Battle of Returns: Term Plan Vs Return of Premium Term Plan
To survive in this competitive world, we need to secure our future. Till the time we are healthy and working, our job guarantees us that. But, if an uncertainty befalls us, our savings are what will come to our rescue. Thus, each one of us tries to increase our savings, that is, to invest. What better form of investment is there than a term life insurance?
Term plans are considered to be the best form of life insurance. There is almost no risk involved. Moreover, in a country like India, where a large number of people die in accidents every year. There have been nearly 1.54 lakh deaths in India in 2019 due to accidents. Thus, you must ensure that the bread-earners in your families are insured. However, most people shy away from getting a term plan assuming that it may not return any maturity benefit.
This is where term plans with return of premiums or TROPs come into play. They return all the premiums paid in case the borrowers end up not needing to claim their insurance amount, thus posing a major question in front of would-be policyholders - Whether term plan or return of premium term plan is a better option?.
Term Insurance Plans
Term insurance is a contract you enter into with an insurance firm over a specified period wherein you pay a fixed sum (called the premium) at regular intervals of time. In case of your demise during this tenure, the company is liable to pay a fixed sum to your family (or whoever you have nominated) for their sustenance.
It usually offers almost full life coverage. The fact that there is very little risk involved also attracts possible buyers. Moreover, the prospect of getting them at 30-40% lower premium values makes online term insurance more popular.
For Example - A 30-year-old non-smoker male opts for a term life plan of INR.1 crore cover for a policy period of 50 years.
|Age||Gender||Lifestyle||Sum Assured||Policy Term||Annual Premium|
|30 years||Male||Non-smoker||INR 1 Crore||50 years||INR 11,352-14,626|
Return of Premium Term Plan
Despite being the easiest and the safest form of investment, people hesitate while buying a term plan, the reason being that the return is not assured if the insured survives the tenure. This is where TROPs come into play.
In simple words, they are term insurance plans with survival benefits. In case of any unfortunate events during the policy period, your loved ones will have the finances to carry on with their lives. However, if you survive the tenure, the premiums you paid are returned back.
For example: Consider the return of a premium term plan that has a yearly premium of INR 5,000 and a cover of INR 50 lakhs for a term of 20 years. In case of the death of the policy insured, the family will be paid the sum assured. On the other hand, if the person insured survives, the premium amount i.e. INR 1 lakh, will be returned to the insured.
|Sum Assured||Policy Term||Annual Premium||Return of Premium|
|INR 50 Lakh||20 years||INR 5000||INR 1 Lakh|
The Comparison – Pure Term Plan vs Return of Premium Term Plan
|PURE TERM PLANS||TERM PLANS WITH RETURN OF PREMIUM|
|POLICY PERIOD||Pure term plans have a policy period of about 30-40 years. The maximum maturity age in this case ranges from 75-85 years, sometimes even 100.||Term plans also have a policy period of about 30-40 years and the maximum maturity age of 75-80 years.|
|PREMIUM||Term plans offer one of the lowest premium values for a high return.||Premium in this case is usually two to three times of that in case of conventional term plans.|
|RETURNS||In case the policyholder passes away during the tenure, his beneficiaries are paid a huge sum (which is usually ten to twenty times the total value of the premiums paid). However, the holder stands at loss if he survives the tenure.||In case the policyholder passes away during the tenure, his beneficiaries are paid a very huge sum. In case he survives the maturity period, the premium amount is refunded.|
|TAX TREATMENT||It provides an exemption from taxes under section 80C(2), section 10(10D) and section 80D of the Income Tax Act of 1961 subject to certain conditions.||TROPs also provide an exemption from taxes under the same provisions.|
Term Plan or Return of Premium Term Plan – What Should You Opt For?
Term insurance, as well as Return of Premium Term Plans (TROPs), are dissimilar regarding many aspects.
The following table of differences will make it clear:
|Pointers||Term Plan||Return of Premium Term Plan (TROP)|
|Premium||The premium to be paid is low.||The premium amount is low but in comparison to regular term plans the premium to be paid is higher.|
|Maturity Benefit and Death Benefit||You will not receive any maturity benefit since this is a death benefit plan. If you survive, the amount will not be refunded to you.||Alongside providing financial security to your family in case of any mishap, this plan offers maturity benefits.|
|ROI||The return rates are fairly high. You will receive 15 times more than the total premium that you paid.||This plan offers high returns too. However, the return rates are lower when compared to regular term plans.|
|Riders||Riders can be added to your plan and they will look after your financial needs. Besides, they are cheaper than opting for stand-alone policies.||Riders can be added in this plan as well. But additional premiums on them will not be compensated for when the policy matures.|
|In case of you couldn’t continue paying premiums||Failure to pay premiums on time or a discontinuation of payment of premiums or in cases where claims are not filed, the company will not pay any death benefit.||A failure to pay premiums for about 3 years, the policy will continue but with reduced benefits. If the policyholder suddenly passes away, the family will receive a reduced sum. When the policy matures and the policyholder outlives the tenure, the amount will be repaid to the policyholder .|
The proper choice of policies always rests on the financial goals of yours. Based on your purposes, you must go after the right kind of policies. If your purpose is only to ensure protection and financial security to your family in case of eventuality, you may opt for a Term plan. But if you want back at least your invested money on policy maturity , choosing a return of premium term plan (TROP) will be a feasible option. However, financial gurus suggest to ensure that the family has adequate financial support in case of bread-winner’s untimely death. Before investing your hard-earned money, keep in mind that your decision matters a lot and could make a huge difference to your family in your absence.