Life insurance: Term plan with return of premium unviable

However, term insurance products themselves can be of different types.

Having adequate life insurance protection in place is a necessity in today’s day and age. It ensures that the dependent family members are not left in the lurch in case of the policyholder’s sudden disability or demise. That said, it’s always wiser to keep insurance and investment separate. As such, it might be a better idea to go with a standard term insurance policy than traditional life insurance products like endowment plans that offer relatively lower sum assured at higher premiums. The funds saved by opting for a term insurance policy can be invested according to one’s returns expectations and risk tolerance to earn higher overall returns.

However, term insurance products themselves can be of different types. There are plain vanilla term plans and also a few variants that return the premium at the end of the policy tenure. So, should you go for them? Let’s discuss the features of a term plan and a return of premium term plan (TROP) to find the answer.

Term plan & term plan with return of premium
A term plan provides life cover for a specified number of years. The premium for a term plan is determined based on the age of the insured and the policy cover size among other factors. These premiums are usually lower than most other life insurance products as there are no maturity benefits or investment expenses for the insurer involved. Term plans come in different variants based on the type of premium and claim pay-outs.

Typically, you can choose the premium payment frequency to be monthly, quarterly, yearly, lump-sum at one time or for a certain period. Similarly, there are different pay-out plans too, like a fixed monthly pay-out plan, increasing monthly pay-out plan, lump-sum payment, etc. You may choose a term plan based on both these factors as per the needs of your dependent family members. You can also include rider options to your term plan at the time of purchase to make it more comprehensive, though this could make it more expensive.

A term plan with return of premium (TROP), on the other hand, is a term plan with an additional feature of a survival benefit. This implies that if you, as the insured, survive till the maturity of the TROP, you will get back the entire premium. You may also get a loan against a TROP policy depending on its paid-up value and subject to applicable terms and under the policy—something which is not possible with a standard term plan.
You can also pay the premiums for a TROP in instalments or at one shot at the beginning of the policy. However, the premium for a TROP is higher than a standard term plan for the same sum assured. This is because the cost associated with the TROP, be it the cost of investing the premiums or administering the policy, is higher than a vanilla insurance policy.

Which one should you opt for?
The TROPs are often advertised as “free life policies” to attract buyers by showing that the insured doesn’t need to pay anything if he survives the policy tenure. However, the reality could be slightly more complicated. In fact, TROPs usually involve much bigger premium obligations than a term plan of identical cover size. Also, the actual value of the premium amount returned at the end of the policy term under a TROP will be much lesser due to inflation. As such, the difference in premiums for a term plan and a TROP with equal sum assured could instead be invested in instruments aligned with the insurer’s risk appetite to build a much bigger corpus.

It is not uncommon for people to invest in TROPs as a last-minute tax-saving measure without putting much thought into it. It might be a better idea to purchase a standard term insurance product for an adequate sum assured at lower premiums. The excess funds can be invested in ELSS mutual funds, tax-saving FDs, PPF, NPS or VPF in line with your risk appetite and liquidity requirements to build a bigger corpus while also helping you to exhaust the tax-deduction benefits at your disposal.

The writer is CEO, BankBazaar.com