Does it make sense to purchase a Term plan with return of premium?

Many of us want expect returns even from our term life insurance plans. Just the thought that you won’t get anything back if you survive the policy term is unsettling for many. Therefore, many insurance companies have come out with term plans that return the entire premium paid at maturity of the plan. Such plans are called Term plans with Return of Premium option (TROP).

In this post, let’s look at what TROPs are and if such plans are better than plain vanilla term plans.

What are Term plans with Return of Premium option (TROP)?

These are just like regular term plans. The only difference is that you get the entire premium back if you survive the policy term.

Hence, if you paid a premium of Rs 30,000 per annum (excluding taxes) for a cover of Rs 1 crore for 30 years, you will get Rs 9 lacs (Rs 30,000 X 30) at the end of 30 years.

In the event of death during the policy term, you will get Sum Assured. There is no return of premium paid.

If the policy holder survives the policy term, he/she is returned all the premiums paid.

A regular term plan will offer benefit only in the event of death while the return of premium term plans offer maturity benefit too.

The premium paid for Return of Premium term plans is less than premium for plain vanilla term plan for the same amount of life cover. However, it is much lower than traditional plans or ULIPs.

Which is better? Regular Term Plan or Return of Premium Term plan?

Let’s compare with the help of an example.

For comparison, I have considered Aviva I-Life (regular term plan) and Aviva I-Shield (Return of premium term plan).

The premium for 30 year old non-smoker male (for 30 years) in case of I-Life plan is Rs 9,745 (including service tax) per annum. On the other hand, the annual base premium for Aviva I-Shield plan is Rs 32,400. After accounting for service tax, the premium is 33,616 in the first year and Rs 33,007 from the second year onwards.

The death benefit is same in both cases. The nominee will get Rs 1 crore in the event of death of the policy holder.

Maturity Benefit: In case of I-Life plan, you get nothing if you survive the policy term. On the other hand, in case of Aviva I-Shield plan, you get 110% of total premiums paid. A minor variation and nothing more than a marketing gimmick.

Therefore, at the end of 30 years, you get back Rs 32,400 X 30 X 110% = Rs 10.69 lacs.

Is it worth it?

You might argue I-Shield (return of premium plan) is a better plan since you are getting something back at maturity.

However, you also need to see that you were paying a much higher premium.

In this case, premium for I-Shield plan is much higher than I-Life plan. In the first year, the difference is Rs 23,870 while it is 23,262 in the subsequent years.

So, essentially, you pay ~ Rs 23,000 extra for 30 years and get Rs 10.69 lacs back.

What is the return?

A phenomenal 2.62% per annum.

If you had gone for a pure term plan (I-Life) and invested the excess in a fixed income product such as PPF that yields say 8% p.a., you would have ended up with Rs 28.5 lacs.

Surrender can be a problem with Return of Premium plans

Life insurance requirement can keep fluctuating. It is quite possible that you purchase life cover for 30 years but realize after 15 years that you no longer need life cover. In case of regular term plans, you can simply stop paying premiums and you are done. The plan will automatically lapse.

In case of return of premium term plans (TROP), you will have to surrender the plan. On surrender, you will get a certain percentage of premiums paid back. Surrender percentage is low (or surrender penalty is high) in the initial years and increases with time.

If you have used a mix of pure term plan and investment (say PPF), you could have simply let the term plan lapse without touching the PPF investment.

Isn’t Return of Premium Term plan similar to a traditional plan?

Some of you may argue TROP is not exactly a term plan. It behaves more like non-participating traditional plan, especially when you look at the poor returns.

Yes, that’s right.

However, the more important aspect of comparison is the annual premium. There is no way you will get a life cover of Rs 1 crore for Rs 33,000 in a traditional plan. The ratio of Sum Assured to Annual Premium is still very high for a TROP (though not as high as a pure term plan).

So, let’s stick to calling these plans Return of Premium Term plans (TROP).

A point to note is that, in a traditional plan, a much bigger amount earns a poor return.

Read: Say No to Traditional Life Insurance Plans

PersonalFinancePlan Take

An oft-repeated advice. Keep things simple.  Do not mix investment and insurance.

Purchase a plain vanilla term plan and invest the excess in pure investment products such as PPF, FDs, mutual funds etc.

A return of premium term plan is not a good choice.

However, if you are keen on getting something back from your term plan, a term plan with return of premium (TROP) is better than a traditional life insurance plan.

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Deepesh Raghaw

Deepesh is a SEBI Registered Investment Adviser and an alumnus of IIM Lucknow. Deepesh provides customized Financial Planning and Investment solutions to his clients. Deepesh is passionate about personal finance and contributes regularly to leading Business Newspapers. Deepesh appears regularly on personal finance shows on Business Television.

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