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Battle of Returns: Term Plan Vs Return of Premium Term Plan

By Vikas Chandra Das
21 July 2022, 11:46 AM
term plan vs return of premium term plan (trop)

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.

  • Term plans usually offer low premium values. They are one of the least expensive ways to insure yourself. Thus, small savers can also opt for them.
  • Term plans usually have a high claim settlement rate. A significantly low risk is involved in purchasing them.
  • The only condition involved is to pay the premiums on time.
  • They basically provide coverage of the financial responsibilities of the beneficiaries.
  • The main feature of term plans is their high return rate. One may purchase insurance, where the claim amount guaranteed, is 15 times of the total premium amount paid.
  • Its purpose is to ensure the security of the beneficiaries after the demise of their bread-earner.
  • Term plans are much easier to understand and less risky than most of the other forms of investment like stocks or mutual funds.
  • They offer a long policy period of about 30-40 years.
  • Riders such as critical illnesses can be added on top of a term plan. They look after your financial needs and are cheaper than going for stand-alone policies.
  • You can always change the premium values with increments in salary. Also, some companies offer term plans wherein the maturity value increases or decreases with time, subject to some adjustments.
  • Perhaps the most appealing aspect of a term insurance plan is that it helps save tax. Premium is deducted from salary to arrive at a taxable amount therefore you don’t have to pay tax on the instalment value.
  • The claim amount can be tax-free too, subject to certain terms and conditions as guaranteed under section 10(10D). This makes term insurance a kind of investment that doesn’t charge interest on profits.
  • The death benefit can be paid as a lump sum or as monthly income or both as chosen by the insured.
  • The money can be used for expenditure, fending off consumer debt, repaying loans, continuing SIPs, etc.
  • If premiums are discontinued in the middle of the tenure or if no reclaim is filed, the company is not liable to pay any death benefit.

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.

AgeGenderLifestyleSum AssuredPolicy TermAnnual Premium
30 yearsMaleNon-smokerINR 1 Crore50 yearsINR 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.

  • TROPs are low premium plans too. However, the premium amount is a little higher than in the case of regular term plans.
  • They too have high claim settlement rates provided that the premiums are paid on time.
  • Their purpose is a little more than ensuring the financial security of your family. They offer you maturity benefits on surviving the tenure as well.
  • TROPs offer high returns as well. However, since you have to pay more premium value each time (usually 2-3 times of that in regular term plans), returns are comparatively lower.
  • Its purpose is to provide the policyholder with the satisfaction that his hard-earned money will not go to waste.
  • Only the premium amount paid is returned. No interest is paid.
  • TROPs are also easy to understand and less risky with a long coverage, just like the usual term plans.
  • Riders can be added here too. However, it is important to note that additional premiums on them will not be compensated for on maturity.
  • Term plans with the option to return premiums offer ‘paid-up’ option as well wherein if you fail to pay premiums after a certain period (usually more than three years), the policy continues but with reduced benefits. In case of the holder’s demise, the family will get a reduced sum whereas, on maturity, the amount will be paid back.
  • TROPs have fundamentally all the features of term plans.

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 AssuredPolicy TermAnnual PremiumReturn of Premium
INR 50 Lakh20 yearsINR 5000INR 1 Lakh

The Comparison – Pure Term Plan vs Return of Premium Term Plan

POLICY PERIODPure 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.
PREMIUMTerm 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.
RETURNSIn 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 TREATMENTIt 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:

PointersTerm PlanReturn of Premium Term Plan (TROP)
PremiumThe 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 BenefitYou 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.
ROIThe 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.
RidersRiders 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.

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