Safeguarding your family’s financial well-being is a top priority, and term life insurance plays a vital role in achieving this goal. When looking for insurance, many people choose term insurance. It is a basic plan that safeguards your finances for a set period of time.
However, another increasingly popular option is the return-of-premium term life insurance that comes with survival benefits. In this article, we’ll explore the return of premium term life insurance meaning, how it differs from pure term insurance, its pros and cons, and whether you should opt for it or not.
Return of premium term life insurance definition
As a new hybrid policy, return-of-premium term insurance (TROP) integrates savings features with the advantages of conventional term life insurance. In the event of your unexpected demise, your loved ones can be financially protected by this particular plan’s death benefit, which also includes a maturity benefit.
You will get a return on your investment (the premiums you paid during the policy’s duration) if you survive throughout the policy’s term.
TROP is an ideal choice for individuals who desire the security of life insurance coverage while simultaneously building a savings fund for the future. It caters to those who want to ensure their family’s financial well-being in their absence and those who seek a disciplined approach to saving money over a specified period.
By opting for a TROP, you can enjoy peace of mind knowing that your beneficiaries will be taken care of if the worst were to happen, and if you survive the term, you’ll have a lump sum amount to look forward to, making it a win-win situation.
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Example of best term life insurance with return of premium
Let’s have a look at an example to see how the policy works.
Meet Ms. Sharma, a 35-year-old entrepreneur who recognises the importance of securing her financial future. As a person with a clean bill of health, she decides to opt for a term plan with a return of premium, selecting a substantial sum assured of ₹75 lakhs.
The annual premium for her chosen plan amounts to ₹18,500, which she will pay diligently for 35 years until the policy reaches maturity.
Now, let’s consider two possible scenarios. In the unfortunate event that Ms. Sharma passes away within the policy term, her designated nominee will receive the full sum assured of ₹75 lakhs.
She will, however, be qualified for a maturity benefit according to the term plan with return of premium if she carries out the whole policy term. This means that upon the policy’s maturity, she will receive a lump sum of ₹6,47,500 (calculated as 18,500 x 35), representing the total amount of premiums she paid throughout the tenure.
How is the return of premium term life insurance different from a pure term?
While both return-of-premium term life insurance and pure term insurance offer a safety net for your loved ones in the form of a death benefit, they diverge in their approach to premiums and the range of benefits provided.
Premiums:
- Pure-term insurance policies are renowned for their budget-friendly premiums, making them an attractive choice for those seeking substantial coverage without breaking the bank.
- TROP plans, in contrast, come with a heftier price tag, as the premiums are structured to account for the unique feature of returning the premiums paid if the policyholder outlives the term.
Benefits provided:
- Pure-term insurance adopts a simple approach, focusing only on paying the selected beneficiaries a death benefit if the insured unfortunately passes away during the policy’s term.
- TROP plans take a more comprehensive stance, offering a two-pronged approach that encompasses both a death benefit and a maturity benefit. Should the insured survive the policy term, the premiums paid are returned, serving as a financial reward for their commitment.
Remember that the percentage of premiums that are reimbursed under a TROP plan varies according to the insurer. In general, the premiums for the base insurance, supplementary underwriting (based on health, lifestyle, etc.), and modal loading (for non-annual payment modes) are reimbursed.
Taxes on premiums and premiums for riders (such as critical sickness or accidental death riders) are often not refundable, however, there are a few exceptions.
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Pros and cons of best term life insurance with return of premium
| Advantages | Disadvantages |
| The policyholder is entitled to a complete reimbursement of all premiums paid if they live longer than the policy’s term. | Return of premium plans typically come with higher premium payments than standard term plans. |
| The policy’s nominee(s) will get the death benefit in the event of the policyholder’s unexpected demise during the policy’s term. | Premiums are only refunded if the insured lives through the term; in any other case, they are not refunded at all. |
| Under Sections 80C and 10(10D) of the Income Tax Act, you can deduct up to ₹1.5 lakhs for policy premiums and get tax-free death and maturity benefits from the TROP plan. | For the benefits to be payable, the policy must remain active and not lapse, which requires consistent premium payments. |
Should you buy a return-of-premium option?
Although a TROP plan appears to be a solid investment choice, it is not. Here are two explanations for this.
- Substantial premiums for insurance
The most affordable option for life insurance nowadays is term insurance. On the other hand, TROP plans have far higher premiums than pure-term insurance policies. Many people cannot pay the premiums since they are significantly higher than standard term plans.
- Premiums not refunded
From an investing standpoint, another major downside of a TROP is that the premiums that are reimbursed to you when the insurance period ends do not earn interest. Additionally, inflation will not be included in the amount you will get.
Taking a look at the time value of money will show you how a quantity that seems sufficient now won’t be worth as much in a few years.
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Conclusion
Return of premium term life insurance plans may cater to a specific audience that prioritises the peace of mind that comes with knowing they will receive their premiums back if they outlive the policy term. However, it’s essential to recognise that these plans come with trade-offs.
That is why it is essential to weigh the benefits and drawbacks before committing to such an insurance plan for your future.
