Think about it: You purchase something for protection, say a fire extinguisher. You don't expect to have to use it, right? But you still purchase it for reassurance. Think of term insurance in the same manner. You purchase it hoping nothing untoward occurs, but you still want your loved ones covered just in case.
But here's the catch. What if you do get your money back in the end, if you don't have to use it? That's what a Return of Premium Term Plan provides for.
It's like this: "I'll secure my loved ones, but if all goes well, I won't lose my money too." Sounds nice? Let's see how this works, and if indeed it's the best option for you.
What is Term Insurance?
Let's begin at the beginning. A term insurance plan is a basic life cover. You pay an annual amount (termed the premium), and your family receives a large payout (termed the sum assured) in the event of your death within the policy term.
So, if you purchase a 30-year term plan and, say, you die during the 20th year, your family gets the entire sum assured. But if you survive the 30 years, the policy matures, and you're not paid a penny back. That's why it's also referred to as "pure" life insurance. It's purely for protection, not for returns.
What is a Term Plan with Return of Premium?
A Return of Premium Term Plan (TROP) is a term insurance policy which functions slightly differently. Similar to normal term insurance, it provides your loved ones with financial security in case you are no longer there. But here's the additional advantage: it pays back all the premiums you have paid if you outlive the policy duration.
So suppose you pay ₹10, 000 annually for 30 years. That amounts to ₹3, 00, 000 in total. If you outlive the period, the insurer will pay you back ₹3, 00, 000. No interest is charged, but at least you don't have the feeling that your money was wasted.
In the third paragraph, it's necessary to mention that term insurance is among the best methods to ensure your loved ones, and for individuals who want a bit of extra value, the best term plan with return of premium provides both protection and cash back benefit.
Why Do People Choose Return of Premium Plans?
Here are a couple of easy reasons why lots of folks are attracted to this kind of plan:
- You Get Your Money Back
You don't feel like you "lost" anything if you survive the policy term. You get back all the premiums that you paid.
- Mental Satisfaction
Most people are glad to know their money will be returned to them. It provides a sense of accomplishment at the end.
- Family Protection Still Remains
Though the premiums are paid back in case you survive, the core intention—financial security for your family, remains active in force throughout the policy duration.
What's the Difference Between Normal Term Insurance and TROP?
Let's tell you the difference in simple words, without using a table.
In a standard term insurance policy, you pay a lesser premium. It gives you a high sum assured, but there is no money-back if you live through the term. It is inexpensive and also only provides life cover.
In a return of premium term plan, the premium is more, often twice or even more. But if you survive up to the end of the policy tenure, all your base premiums are paid back. But the money refunded doesn't cover taxes or rider fees, and no interest is included.
Both plans offer you tax relief under Section 80C and 10(10D), and both secure your family's financial future. The one major difference is: do you prefer lower premium or do you prefer getting your money back?
Should You Buy a Term Plan with Return of Premium?
Now comes the burning question: Is this plan suitable for you?
Let's consider both sides:
Reasons to Consider Buying It:
- You Like Having Something Returned: If you don't like parting with money without receiving something back, this plan puts your mind at ease.
- You Can Pay the Additional Fee: TROP plans are costlier. If you can afford it, it can be an option.
- You Like Low Risk: This plan does not make your money increase, but it is secure. You receive back what you had paid.
Reasons to Reconsider:
- Premiums Are Much More Expensive: You may have to pay twice for identical coverage. If you are on a tight budget, it's advisable to stick with a basic plan.
- Returns Are Not That Excellent: There is no interest on the returned premiums. If you invest the difference somewhere else, you can earn better growth.
- Other Investment Options May Be More Effective: If you are smart with money and understand how to invest, a traditional term plan along with mutual funds or PPF can provide you with greater amounts of money in the long run.
Let's Consider a Simple Scenario
Ravi is 30 years old. He wants a ₹1 crore cover for 30 years.
- If he purchases a traditional term plan, his premium could be ₹8, 000 annually.
- If he purchases a return of premium policy, the premium may reach ₹25, 000 annually.
So, in 30 years:
- With standard term: Ravi pays ₹2.4 lakhs. If he survives, he receives nothing.
- With TROP: Ravi pays ₹7.5 lakhs. If he survives, he receives ₹7.5 lakhs.
But what if Ravi had opted for the lower-cost plan and invested each year's ₹17, 000 in mutual funds or a savings scheme? That could amount to ₹20+ lakhs in 30 years.
It's a matter of priorities: Do you want assured safety and return—or are you willing to take some small risks for extra returns?
Things to Keep in Mind Before Buying
If you're considering purchasing a return of premium term plan, here are some tips to guide you in selecting wisely:
- Verify whether the sum assured is sufficient to cover your family.
- Ensure that the premium is within your budget for a long period of time.
- Read the terms of the policy some plans return only the basic premium and exclude taxes and additional riders.
- Compare plans with trusted online portals.
- Talk to a professional or guide in case you are uncertain.
Conclusion
A return of premium term plan offers you the best of both worlds, your money back and protection. It's ideal for those who desire protection and a feel of return, even if there is no interest being accrued.
But don't buy it just because it sounds nice. Consider your budget, your objectives, and your family's requirements. If you don't mind paying extra for the comfort, it's a good option. If you desire to save more and invest wisely, a minimum term plan could be more suitable.
Whatever you decide, the key is to get insured early, because life is unpredictable, but security doesn't have to be.