Is Term Insurance with Return of Premium Worth the Extra Cost 

It can be challenging to figure out the perfect life insurance for oneself. The idea that money invested in a policy will be returned to the policyholder at some point is what most of us in India are accustomed to hearing. That is why many people are asking: Should one pay extra for Term Insurance with Return of Premium?

When looking at term insurance plans, one can easily come across two types of plan options. One is the “Pure Term Plan,” and the other is the term insurance plan with return of premium, or TROP.

We can quickly summarize both for you to make a choice that suits your family and your budget.

What is a Pure Term Plan?

A pure term plan is essentially an agreement wherein, in return for a small payment (premium), the insurer purchases a large sum of money that is paid to the family in case the insured person passes away during the term of the policy. Such a payout can be used to cover living expenses, educational fees, or outstanding debts.

On the other hand, if the policyholder manages to stay healthy and lives until the policy expires, then no payout will be made. The “expense” one incurred was for a comforting sense of security every day.

What is a Term Plan with Return of Premium (TROP)?

This option is for those who can’t stand to part with their cash when the policy term expires. If it happens that the policyholder is alive at the end of the term, the insurance company will refund all the premiums that the policyholder has paid over time.

Sounds like a fantastic deal, doesn’t it? You get the coverage, and you also get your money back! But there is a catch.

The Price Difference: The “Extra Cost”

The main thing you should understand about a term insurance plan with a return of premium is that they are way more expensive than regular plans. Typically, the cost is 2-3 times the standard.

Simple Case:

Say Rahul and Amit are the same age, 30 years old. They both want a ₹1 Crore cover for 30 years.

• Rahul goes for a Pure Term Plan: It will cost him about ₹10,000 per year.
• Amit opts for a TROP Plan: It will cost him about ₹25,000 per year.

What if both of them live until the end of 30 years:

• Rahul has no returns.
• Amit receives his premium payments back (around ₹7.5 Lakh).

Initially, Amit seems to be getting the better deal. But let’s break it down.

Why the Pure Term Plan Might Be Better

The additional sum Amit gave (₹15,000 more than Rahul every year) was essentially the amount the insurance company kept for him.

If Rahul had put that spare ₹15,000 into a fixed deposit or a Mutual Fund (SIP), he might have accumulated a lot more than ₹7.5 Lakh. Considering safe returns of 8% to 10% over 30 years, that money might have increased to ₹18 Lakh or even ₹25 Lakh.

When you opt for the term insurance plan with the return of premium, essentially you are getting your money back, but you are missing out on the interest that money could have accumulated.

The Benefits of Return of Premium (TROP)

In fact, it is not surprising if the TROP plan cost is higher for the same coverage. However, here are some reasons why some people still opt for this plan:

• For many Indians, getting a lump sum at 60 years of age is very reassuring. This ‘return of premium’ component of the plan feels like a ‘reward’ for having stayed healthy till that age.
• Those who have a tough time saving money regularly may find this plan works well in their behalf. So, you are quite literally paying yourself since the money will be returned to you later on.
• It is just like a regular term plan where insurance premiums are tax-deductible under Section 80C. Moreover, most of the time, TROP premium is quite higher than regular term plan premium, and so it helps higher taxpayers to have a larger amount of tax exempted.
• Also, the amount received upon maturity is almost always tax-free under Section 10(10D).

Who Should Choose Which Plan?

Choose a Pure Term Plan if:

• You want to be covered for a very high amount with an affordable premium.
• You are disciplined in investing your savings in other instruments like PPF, gold, mutual funds, etc.
• You want to reduce your monthly expenses to the bare minimum to be able to survive comfortably.

Choose a Return of Premium Plan if:

• You absolutely hate the idea that your money given to an insurance company does not come back to you in any form.
• You want a guaranteed lump-sum retirement fund.
• You do not have a problem paying a higher premium today with the hope of a ‘refund’ tomorrow.

Things to Remember Before You Buy

It is advisable to keep the following three points in mind before you finish the policy:

• GST is not refunded: In the case of the company saying “Return of Premium, ” at most, they mean the principal amount. Usually, the GST (tax) you pay on the premium is not returned.
• Rider costs: If you put on additional benefits like “Accidental Cover, ” see if the company returns those items’ costs or not.
• Inflation: ₹7 Lakh is a considerable amount today. However, after 30 years, due to price increases (inflation), ₹7 Lakh may only get you what ₹2 Lakh does today.

Conclusion

Is paying more justified? If you consider it just as a math issue, the result is generally no. You could earn higher returns by getting a low-cost term plan and investing the rest on your own. On the other hand, life is not just about numbers. If the thought of getting back your money makes you feel secure and lets you have a better sleep at night, then the term insurance plan’s return of premium is a perfect option for you. Ultimately, the key thing is to have some kind of life insurance. Whether it is simple or with a return, do not forget to protect your family right now!