Term insurance plans are an important necessity for every earning member of the family as they provide financial security for a family in the event of their untimely death. They offer high coverage at lower premiums, ensuring that loved ones are protected from financial hardships. Pure-term plans come with only death benefits and no survival benefits as the premium paid is only for risk cover. That means the policyholder gets no benefit if he/she survives the policy terms. To cater to cost-conscious people who expect payback at the term, insurance companies have a variant in term plan called term plan with return of premium.
The term plan with return of premium is an attractive variant for many policyholders. It combines the benefits of a term plan that offers life cover with the assurance of receiving back the premiums paid at the end of the term upon survival. Here is a detailed exploration of the plan, how it works, pros and cons.
What is the return of premium in the term plan?
The ‘return of premium’ option is a lucrative add-on feature in term insurance plans. In this, the insurance company returns or pays back all the premiums paid by the policyholder during the term if he/she survives the policy term. It combines the protection aspect of term insurance with a savings component. Hence, the premium for term plans with a return of premium is relatively higher than the regular term plan.
Here is an example to understand the concept of return of premium in the term plan. Let us say Mr. X aged 30 has purchased INR 1 crore term cover (with the return of premium option) for 20 years at an annual premium of INR 25,000. Unfortunately, if Mr. X dies during the 20-year term, the insurance company pays the death benefit of INR 1 Crore to the beneficiary in the term plan and terminates the policy. In case, Mr. X survives the 20-year term, the insurance company pays back all the premiums paid (20,000X20) till the end to Mr. X.
Pros of return of premium option in term plan
The following are the benefits of the ROP option in a term plan:
Financial security
Like any pure term plan, the primary benefit of a term plan with a return of premium option is to provide a death benefit in an unforeseen event during the policy term. This ensures financial protection for the policyholder’s family even when they are not around.
Return of premium
The most significant benefit of the term plan with the return of premium option is getting back the premium cost at the end of the term if the policyholder outlives the term. This feature mitigates the feeling of “losing” money on premiums if the insurance coverage is not utilised.
Tax benefits
Premium paid-for-term insurance with the ROP option is eligible for tax deductions under Section 80C of the Income Tax Act, of 1961. Additionally, the death benefit is tax-exempt under Section 10(10D) of the IT Act.
Comfort to invest
Many people hesitate to invest in term insurance considering it as an unnecessary cost. The idea of receiving back premiums paid if they survive the term provides comfort to investing in a term plan.
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Cons of return of premium option in term plan
The following are the drawbacks of investing in a term plan with a return of premium option:
Higher premium
The premiums for term insurance plans with the return of premium option are significantly higher than those for regular term plans. This increased cost can be a financial burden, especially for individuals seeking affordable coverage.
Opportunity cost
The extra money paid as part of higher premiums for the ROP option could be invested elsewhere for potentially better returns. Policyholders might achieve higher financial growth by opting for a regular term plan and investing the difference in premiums in other investment products.
Conclusion
To conclude, term insurance with a return of premium option can be an appealing choice for individuals looking for an added benefit of return of premium at the end and life cover during the term. However, it is crucial to weigh the benefits against the higher premium and the opportunity cost of not investing the additional premium amount elsewhere. Before you invest, assess your insurance needs, and consider the affordability and financial goals to make a rational decision.
