Simplifying Life Insurance in India
Term Plan with Return of Premium
If you are looking for the financial well-being of your family for the long term, a Term Plan is the best option. They are affordable and simple. With a Term Plan, you get your required coverage at an affordable premium.
In the case of regular Term Insurance, a pure insurance product, the Death Benefit is paid to the beneficiary in case of the policyholder's demise during the policy term. Nothing is paid if the policyholder survives the policy term, i.e., these Term Plans do not have any survival benefits.
This is the only drawback of a Term Insurance Plan, making many people think, "Term Plan pays money only when I die".
That's one way to look at it!
However, a Term Plan with a Return of Premium Option (TROP) might be a good choice for people looking at some cash value and an affordable option compared to the permanent plan.
What is Term Plan with Return of Premium?
Term Insurance with Return of Premium is a non-participating insurance plan that provides a guaranteed return of premium option. Under this variant, there are two types of claim benefits:
1. The nominees are paid Sum Assured in case of the policyholder's death during the policy term.
2. In a case where the policyholder survives the term, the entire premium paid towards the policy is reimbursed to the policyholder, provided all the premiums are paid.
How does Term Plan with Return of Premium work?
To understand how Term Insurance with the Return of Premium works, let us take an example:
Mr Aditya, a 30-year-old man, is looking to secure coverage for himself. He is a healthy man without any smoking habits or a history of medical problems. He opts for a term plan with a return of premium and selects a sum assured of Rs. 50 lakhs.
Suppose the annual premium payable for his plan is Rs. 12,718 for a tenure of 40 years, i.e. till the policy's maturity.
Now, let's see the two scenarios that might happen in this case:
Mr Aditya passes away within the policy tenure: In this case, the person assigned as the nominee will receive the sum assured of Rs. 50 lakhs.
Mr Aditya survives the policy term: He will receive a maturity benefit. In this case, he will receive Rs. 5,08,720 (12718 x 40) upon maturity of the policy.
Features of Term Plan with Return of Premium
1. Affordable Coverage
A Term Plan with Return of Premium is known for its affordability. Compared to traditional life insurance policies, the premium for TROP is generally higher, but it provides an attractive proposition of a potential premium refund.2. Guaranteed Premium Return
The primary feature of a TROP is the guaranteed return of premium. If the insured survives the policy term, i.e., the policy's maturity, the premiums paid throughout the policy duration are returned. This ensures that the insured receives back the total amount of premiums paid, making it a popular choice for those seeking life coverage and a potential financial return.3. Paid-Up Option
Some TROP policies offer a paid-up option. If the policyholder is unable to continue paying premiums due to financial constraints, they can convert the policy into a paid-up policy. This means that the coverage amount is reduced, but the policy remains in force without the need for further premium payments. The reduced coverage is typically calculated based on the premiums already paid and the premium payment term.4. Riders
Term Plans with a Return of Premium often allow adding additional riders or benefits to enhance the coverage. Common riders include critical illness riders, accidental death benefit riders, waiver of premium riders, and disability riders. Adding riders allows policyholders to customise their coverage based on their specific needs and provides added protection against unforeseen events.5. Premium Payment Options
TROP policies offer various premium payment options to suit the policyholder's preferences and financial situation. These options may include:
One-time payment: The entire premium is paid in a single lump sum at the inception of the policy.
Regular pay: Premiums are paid annually, semi-annually, quarterly, or monthly throughout the policy term.
Pay till 60: Premiums are paid until the policyholder reaches the age of 60.
Limited pay: Premiums are paid for a specific period shorter than the policy term, while the coverage continues for the entire term.
6. Maturity Benefits as Refund Amount
The maturity benefit of a Term Plan with a Return of Premium is the refund of premiums paid. If the insured survives the policy term, they receive the total premiums paid throughout the policy duration, excluding any applicable taxes, fees, or deductions.
This maturity benefit provides a lump sum amount that can be utilised as desired, such as for future financial goals, retirement planning, or other personal needs.
7. Surrender Value
Most Term Plans with a Return of Premium have a surrender value. If the policyholder wants to discontinue the policy before its maturity, they can surrender it and receive a certain percentage of the premiums paid. The surrender value varies depending on the policy's terms and conditions, including the policy duration and the premiums paid.
For example, for Single Premium Payment types, the surrender value is valid right after the complete premium is paid. However, for Regular and Limited Payment type policies, the surrender value is usually valid after two premiums are paid.
Benefits of a Term Plan With Return of Premium
1. Death Benefit
Similar to traditional term insurance, a TROP policy provides a death benefit to the nominee in the event of the policyholder's untimely demise during the policy term. The death benefit is paid as a lump sum amount and can help provide financial support to the family and dependents left behind. It can be used to cover daily expenses, outstanding debts, children's education, mortgage payments, and other financial obligations.2. Tax Benefit
TROP policies offer tax benefits under the prevailing tax laws. The premiums paid towards the policy are eligible for tax deductions under Section 80C of the Income Tax Act, subject to the specified limits. Additionally, the death benefit received by the nominee is generally tax-free under Section 10(10D) of the Income Tax Act, ensuring that the family receives the full benefit without any tax liability.3. Return of Premium Benefit
The primary advantage of a TROP policy is the return of premium benefits. Unlike traditional term insurance, where premiums paid are not refunded if the insured survives the policy term, a TROP policy guarantees the return of premiums paid if the policyholder survives the entire policy duration.
This ensures that the policyholder receives back the total premiums paid, making it a popular choice for those seeking financial protection along with the potential for premium refunds.
Who Should Buy Term Plan with Return of Premium Policy?
Any individual can buy a Term Insurance plan with a Return of Premium. You can easily compare online term insurance plans with the return of premium option and take a decision based on your requirements. Analyse your age, income source, lifestyle habits and medical conditions to find the right policy.
A Term Plan with a Return of Premium can be a viable choice for the following people:
Unmarried: You still might have your parents or siblings as dependents.
Married without children: Spouse might also be dependent now along with the existing dependents.
Married with children: So that uncertainty does not come in the way of your child's future.
How to Choose a Term Insurance Plan with Return of Premium?
1. Assess Your Needs
Evaluate your financial goals, your family's lifestyle, and future obligations. Determine the desired coverage amount and policy term based on your current income, outstanding debts, children's education, and other financial responsibilities. This assessment will help you determine the appropriate coverage that aligns with your needs.2. Compare Premiums
Obtain premium quotes from multiple insurance providers offering TROP policies. Compare the premium rates while considering the coverage amount, policy term, and additional features. Ensure that the premium amount is affordable and fits within your budgetary constraints.3. Understand Policy Terms and Conditions
Thoroughly review the terms and conditions of the TROP policy. Pay attention to details such as the policy term, premium payment period, surrender value, and exclusions. Understand the circumstances under which the premiums will be refunded and any penalties or charges associated with policy cancellations or alterations.4. Check the Claim Settlement Ratio
Research and evaluate the claim settlement ratio of the insurance company offering the TROP policy. A higher claim settlement ratio indicates a better track record of timely and hassle-free claim settlements. Choose an insurance provider with a good reputation for customer service and efficient claims processing.5. Consider Riders
Assess if you require additional coverage or riders to enhance your policy's benefits. Common riders include critical illness riders, accidental death riders, disability riders, and waiver of premium riders. Choose the riders that align with your specific needs and provide comprehensive protection for you and your family.6. Check the Insurer's Reputation
Consider the reputation and financial stability of the insurance company. Research their ratings and reviews to ensure they have a strong track record of honouring claims and providing excellent customer service. Opt for insurers with a high credit rating and a good reputation in the insurance industry.7. Read Customer Reviews
Read reviews and testimonials from existing policyholders of the insurance companies you are considering. This will provide insights into their experiences with claims, customer service, and overall satisfaction with the TROP policy. Consider the feedback to gauge the insurer's credibility and customer-centric approach.8. Compare Policy Features
Compare the features and benefits offered by different TROP policies. Look for features like accidental death benefits, terminal illness coverage, premium payment flexibility, conversion options, and additional benefits the insurer provides. Choose a policy that offers comprehensive coverage and additional features that suit your needs.Term Plan with Return of Premium vs Pure Term Plan
Term Plan is not a usual investment product and is not directed towards the goal of wealth creation. However, it is a wealth protector in case of unfortunate circumstances.
Let’s discuss the striking differences between the Pure Term Plan and Term Plan with the Return of Premium:
| Point of Comparison | Pure Term Plan | Term Plan with Return of Premium |
| Insurance Claim Benefit | A Pure Term Plan provides only death benefit as a part of coverage. | TROP provides death benefit in case of death during the policy term. However, in case of survival, it pays out the sum of all premiums paid. |
| Premium | The premium of a Pure Term Plan is quite affordable. Usually, 0.1% of the Sum Assured. | The premium of a TROP is usually 2-3 times higher than the Pure Term Plan. |
| Sum Assured | The Sum Insured for an X amount of premium in case of Term Insurance is usually 10X. | The Sum Assured in case of TROP is usually much lower when compared to the Pure Term Plan. |
| Goal for Investment | Best suited for people whose primary aim is to provide an elevated level of financial security to their family with a high sum insured. | Best suited for people who are looking for an optimum financial protection and some return value on the investment. |
| Premium Refund | No Premium Refund in this case | All Premiums paid are refunded on policy maturity |
| Surrender Value | Does not have any surrender value since there is no savings component | Provides surrender value if the policy is ended early but after the minimum required period for surrender. |
FAQs about Term Plan with Return of Premium
Do I get my money back if I cancel my Term Insurance with a Return of Premium?
Is the Return of Premium Under the Term Plan with Return of Premium Taxable?
Are NRIs eligible for Purchasing Term Insurance in India?
What are a few Cons of Term Plan with Return of Premium?
- TROP has very limited options across insurance providers. So it's usually difficult to find a suitable insurance policy.
- If you are looking at the cash value of your investment, you should rethink. TROP are more expensive than the regular term plans. The extra money spent could be saved somewhere better. Also, if you look at the large tenure of these policies, you will realise that the money that you receive as a refund is depreciated due to inflation.
Is the Premium Amount Higher for TROP Compared to Traditional Term Insurance?
Can I customize my TROP Policy with Additional Riders?
Is the Death Benefit Different in TROP Compared to Traditional Term Insurance?
What happens if I miss a Premium Payment in TROP?
Can I surrender my TROP Policy and Receive the Premiums Paid before the Completion of the Policy Term?
Can I renew my TROP Policy After the Completion of the Policy Term?
Other Important Articles Related to Term Insurance
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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