Are you investing in a term policy anytime soon? If you answer yes, then you need to know that there are two kinds of term insurance plans for policyholders, namely conventional term plans with pure coverage and term insurance plans with the return of premium (TROP) feature. While the latter may seem like an ideal investment option on all fronts, many experts suggest that regular term insurance is still the best choice for most people. So here’s looking at the same closely in this article.
Regular Term Policy Or TROP- Some Crucial Points Worth Noting
A term policy is one of the most popular insurance products in the country, and with good reason! It ensures the availability of handsome insurance coverage for a relatively smaller premium amount. While there are term plans that only offer a fixed sum assured upon the demise of the insured person within the policy period, there are other versions that offer the return of premiums paid by policyholders. You can make use of a term plan calculator to work out the premiums payable in the case of each of these plans in order to get a better idea.
Here are some pointers worth noting in this regard:
- Suppose you have opted for a policy with a sum assured amount of Rs. 1 crore. If it is a regular term plan, then your dependents will get this amount upon your demise within the policy period. If you outlive the policy tenure, then there will be no payout.
- If it is a term plan with the return of premium feature, then the sum assured of Rs. 1 crore will be similarly paid out to your dependents upon your demise within the policy period. However, if you outlive the policy period, then you will get back the premiums paid for the policy over the years.
- The key point to note is that both these plans have different yearly premium mounts. Since TROPs (term insurance plans with return of premium) involve the return of the premiums paid at the time of maturity, they are costlier than pure term plans.
- This difference can sometimes be a staggering amount. Experts estimate that premiums for a TROP can be at least two to four times costlier than regular term plans.
An example will help illustrate the differences clearly:
Suppose a 35-year-old individual (male) purchases coverage of Rs. 1 crore for a period of 30 years. Now, the premium amount can be Rs. 15,624 per year. For the same variables, a term insurance plan with a return of premium will require Rs. 26,220 per year.
At the time of maturity, you will receive Rs. 7.86 lakh as the premium amount over a period of 30 years. However, the premium difference cannot be neglected. The differential amount between the two premium amounts is Rs. 10,596 per year. Remember that the insurance company will return only the premium you pay without interest. Therefore, you can use this amount of Rs. 10,596 each year (if you opt for a regular term insurance plan) to invest in various avenues for 30 years. At a nominal interest rate of 7%, you will receive close to Rs. 10.8 lakh approximately with compounding. With 8%, it crosses Rs. 13 lakh, and at 10%, it is almost Rs. 19.3 lakh.
This difference is massive if you compare it with the return on premium, which is Rs. 7.86 lakh. And then there’s the fact that the insurance company does not return your entire premium, which actually makes your net outlay even lower.
Is The Full Premium Returned In A TROP?
For a term policy with the return of premium, the feature will not fully return the entire premium amount to the policyholder, less the taxes. Instead, only some parts are returned, and this may vary across insurers. Here are some pointers worth noting in this regard:
- Your base premium paid over the entire policy tenure will be returned at the end of the policy tenure
- Additional underwriting premiums charged on the basis of health, medical reports, and habits are mostly returned, although there are exceptions to this rule
- Modal loading premiums or amounts charged by the insurer when you choose to pay via quarterly, monthly, or half-yearly systems will also be returned in most cases
- Taxes on premiums will not be returned since these are paid to the Government by the insurance company
- Rider premiums are also not returned, although a few exceptions may exist
At the same time, surrendering a TROP before the expiry of the policy period will lead to no death benefits, quite obviously, and a surrender benefit that is paid immediately. The surrender value is calculated by the insurer based on the number of years for which your policy was active. The SV factor is multiplied by the total premiums paid for calculating the surrender value amount.
For a reduced paid-up plan, you can continue the same till the end of the tenure without any future premium payments. However, the death benefit will also reduce in proportion to the premiums already paid. If you continue, the lower benefit will be given to your nominee in case of your demise within the policy tenure. If you outlive the tenure, then the premiums paid before the conversion of the policy to a reduced paid-up one will be returned. Hence, a regular term insurance plan still has the edge over its return on premium counterpart. You should compare everything carefully and take financial advice before proceeding.
