Term plans with return of premium. Worth it or not?
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Term insurance is one of the most popular types of life insurance in India. But, did you know that there are two different types of term insurance products that you can choose from? Yes, we’re talking about regular term insurance and term insurance with return of premium. Both these types of plans are very similar to each other. But they do have a single important difference. That is what we will be looking at in this article.
Now, before we actually get into what term insurance with return of premium actually is, let’s first take a look at a regular term insurance plan.
What is regular term insurance?
Also known as just term life insurance, a regular term insurance plan is the most basic type of life insurance product. You’re probably wondering why it is called ‘term’ insurance, right? It is because the life insurance coverage you get from a term plan is valid for a specific tenure. So, the product has been named as ‘term insurance.’
In a regular term insurance plan, the policyholder makes periodic payments known as premiums to the insurance service provider. And in exchange for these premiums, the insurance service provider gives the policyholder a life cover.
In case the policyholder passes away during the tenure of the insurance plan, the service provider pays out a lump sum amount of money as the death benefit. This is paid to the nominees of the deceased policyholder. But what happens if the policyholder survives till the end of the insurance plan’s tenure? Well, in that case, no benefits would be paid out.
Here’s an example that can help you understand this better.
Meet Rajesh. He recently purchased a term insurance plan with a tenure of 20 years from one of the leading insurance companies in the country. According to this plan, he’s required to pay Rs. 3,000 each month for a total of 20 years. And in return, he receives a life cover of Rs. 1 crore.
5 years down the line, Rajesh gets into an accident and loses his life. So, the insurance company would pay the life cover of Rs. 1 crore to Rajesh’s nominees as a death benefit. On the other hand, if Rajesh had managed to survive till the end of the tenure, which was 20 years, then Rajesh would not have received any benefits from the insurance company.
But, is there a type of term plan that gives you your premiums back? Let’s see.
What is term insurance with return of premium (ROP)?
Now that you’ve understood what a regular term insurance plan is, let’s move on to see what a term insurance with return of premium is.
A term insurance plan with return of premium is the same as a regular term insurance plan - but it just has one additional feature. It gives policyholders some kind of benefit for surviving the policy tenure. The benefit that’s paid out at the end is basically the total of all of the premiums paid by the policyholder till the policy maturity.
Confused? Don’t worry. Here’s an example that can help.
Let’s take the case of Rajesh once again. Now, if you remember, Rajesh had to pay Rs. 3,000 each month for 20 years, right? So, the total amount of premiums that he would have to pay comes up to Rs. 7,20,000 (Rs. 3,000 x 12 months x 20 years).
If Rajesh survives till the end of the policy tenure, he wouldn’t be eligible for any benefits under a regular term plan. However, under a term plan with return of premium, when the policy matures, he would get back the Rs. 7,20,000 that he paid as premiums.
Now, are you wondering why somebody would choose a regular term plan when there is a term plan with ROP available? That is a very common doubt. In fact, many people often worry that they do not get their money back with regular term plans. But then, remember that ROP is just one feature. It is not the essence of a term plan. In fact, the main idea behind a term plan is that it offers affordable life covers for a specific term. And a regular term plan does that very well.
Let’s see how you can still benefit from these plans.
Why should you choose a regular term insurance plan?
Despite the apparent advantage offered by a term plan with return of premium, here’s why you can still benefit greatly from a regular term insurance plan.
Large life covers at ultra low premiums
This is clearly one of the best reasons why you should purchase a regular term insurance plan. Since a term plan is a pure life insurance product, the premiums that insurance service providers usually charge are very low. That’s not all. In addition to paying such low insurance premiums, you still get to enjoy a huge life cover.
No additional premiums to be paid
Another major reason to choose a regular term insurance plan is that you don’t have to pay any additional premiums. On the other hand, for term insurance with return of premium, insurance companies generally charge additional premiums over and above the base premium.
Availability of several add-on riders
When you opt for a regular term plan, you’re also given the choice to add several riders to your base policy. This is available for a nominal additional premium, and it allows you to increase the protection offered by the plan even more. Some of the riders that you can choose include accidental death and disability rider, critical illness rider, surgical care rider, and hospital care rider, among others.
Now, this option is also available with a term plan with return of premium. But choosing riders over and above the ROP option will increase the total amount of premium that you would have to pay.
With a regular term plan, even if you choose two or more riders, the total amount of premium may still be lower than what you would have to pay if you had opted for a term plan with ROP.
In addition to these three benefits of a regular term insurance plan, there's also one more - tax benefits1 under Section 80C, 80D, and 10(10D) of the Income Tax Act, 1961. This is common across both the types of term insurance plans.
With so many benefits of a regular term insurance plan, it still makes sense to opt for one even today. If you're looking for a cost-effective and affordable life insurance option that gives you a large life cover, then regular term insurance may still be the right choice for you.
1Tax benefits are subject to changes in tax laws. Consult your financial advisor for more details.
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