Over the last couple of weeks, I had interesting discussions with a relative and a client. Given their requirements, I had asked them to purchase term insurance plans. However, they couldn’t reconcile with the fact that they wouldn’t get anything back if they survived the policy term.
I am sure they are not alone. Just the thought that you won’t get anything back if you survive the policy term is unsettling for many. For this reason, many insurance companies have come out with term plans that return the entire premium if you survive the policy term. Let’s call such plans Term plans with Return of Premium option (TROP). In fact, the client found merit in this variant of term insurance. At least, she gets something back.
In this post, let’s look at what TROPs are and if such plans are better than plain vanilla term life insurance 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 paid 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 policyholder survives the policy term, he/she is returned all the premiums paid. In some cases, the policyholder may even be paid some returns on the premiums paid.
The premium paid for Return of Premium term plans is higher than the annual premium for a plain vanilla term plan for the same amount of life cover. However, it is still 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.
I went to a popular insurance aggregator website (PolicyBazaar) and compared the premium of online term plans with (and without) return of premium plan. I picked up products from ICICI Prudential and HDFC Life.
Following are the premiums for 30-year old male (Sum Assured: Rs 1 crore, Policy Tenure: 30 years)
Without return of Premium
- ICICI Prudential iProtect Smart: Rs 9,739 (includes GST)
- HDFC Life 3D Protect Plus Life option: Rs 9,718 (includes GST)
With Return of Premium (TROP)
- ICICI Prudential Smart Money Back: Rs 22,278 (includes GST), Survival Benefit: 8.54 lacs. Annual premium in the subsequent years will be Rs. 21,798
- HDFC Life Return of Premium Plan: Rs 24,968 (includes GST), Survival Benefit: Rs 7.16 lacs. Annual premium in the subsequent years will be Rs. 24,430.
The death benefit is the same in all four cases. The nominee will get Rs 1 crore in the event of the death of the policyholder.
Survival Benefit: As mentioned above, if you survive the policy term, you won’t get anything back in regular term plans (ICICI iProtect, HDFC Click 2 Protect 3D Plus Life). You get Rs 8.54 lacs in ICICI Smart Money Back and Rs 7.16 lacs in HDFC Life Return of Premium plan.
Is it worth it?
You might argue that the return of premium plans are better since you something back if you survive the policy term. Under regular term plans, your premium paid goes down the drain. However, you must see that you were paying a much higher premium.
For ICICI plans, the difference is Rs 12,539 in the first year (Rs 12,059 in the subsequent years). By paying this amount extra, you get Rs 8.54 lacs at the end of 30 years (provided you survive the policy term).
For HDFC Life plans, you pay Rs 15,250 more (Rs. 14,712 in the subsequent years). If you survive the policy term, you get Rs 7.16 lacs back.
Instead of going with the Return of Premium Term Plan, you could have gone with a simple term insurance plan and invested the difference amount in PPF. Let’s compare the performance.
What is the return?
For ICICI plan, you pay about Rs 12,000 more every year and get Rs 8.54 lacs at the end of the policy term (30 years). That is IRR of 5.07% p.a.
For HDFC Plan, you pay about 15,000 extra every year and get Rs 7.16 lacs. An IRR of 2.95% p.a.
Had you invested the difference amount in PPF, you would have ended with 14.8 lacs in case of ICICI and 18.05 lacs in case of HDFC. I have assumed PPF offers 8% p.a.
Clearly, a combination of PPF and regular term plan is better than the Return of Premium Term Plan.
Not just that, under TROP, you get the survival benefit if you survive the term. If you don’t, all your family gets is death benefit. Survival benefit is meaningless. With PPF, the money always belong to you (and after you, your family).
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 the 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 a 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.
What should you do?
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 still better than a traditional life insurance plan.
The post was first published in December 2016 and has been updated since.