Term Insurance with Return of Premium (TROP) Plan
The insurance industry of India is the 5th largest insurance industry in the world in terms of premium volume of INR 5.53 Trillion. Indian insurance industry has a huge untapped potential to grow as only 25% of the population is covered by some kind of insurance. Lack of awareness about insurance is the major factor behind slow growth of the insurance sector even after the deregulation.
Another important reason behind slow growth of the sector is the perceived lack of benefits. This is particularly evident while purchasing a life insurance policy. Term plan, the simplest and most popular form of life insurance, offers financial benefits to one’s family in case of your one’s untimely demise. But what happens if the individual survives the term? A vanilla term insurance plan doesn’t offer any survival benefits. If there are no survival benefits then individuals are not very keen to take term insurance. They believe in such kind of insurance policy they are donating money to the insurance company with no returns..
This article talks about a variant of the term plan that offers you a survival benefit. It is called Term life insurance with return of premium, or TROP.
What is Term Insurance with Return of Premium Plan (TROP)?
The TROP variant provides benefits at the maturity of term insurance in case the policy holder survives the tenure of the insurance policy. . Under this plan, the premiums paid over the lifetime of the policy are given back as survival benefits to the policyholder.
In case the insured does not survive the tenure of the insurance policy, the insurance company pays the sum assured to the nominee.
How does TROP work?
Let us take an example; Assume that Anil (age 25) purchases a term insurance policy with a return of premium option. The sum assured is INR 1 Cr, the premium amount is INR 20,000 per year, and the policy term is 40 years. In case Anil dies during the policy term, his nominee will receive the sum assured of INR 1 Cr. However, if he survives the tenure, i.e., at the age of 65, TROP will provide him with a survival benefit. This benefit would be equal to the sum of the premium amount paid over the entire policy tenure (40 years), i.e., INR 8 lakh (Rs. 20,000 x 40 = 8,00,000).
Things to Keep in Mind Before Purchasing TROP
It does seem lucrative to opt for the TROP variant of the term insurance plan. This plan gives you a maturity benefit, unlike regular term plans. However, there are caveats to keep in mind before opting for TROP plans.
- Paid-up option: Some TROP plans come with a ‘paid-up’ option in case you default on your premium payments. The option typically sets in after at least three years wherein the policy will be active but with reduced benefits. The guarantee of maturity benefit, i.e., the refund of all premium paid, remains active if you survive the term. However, your nominee will receive a lesser sum assured in case of your untimely death during the period.
- Higher premiums: An essential factor to consider while purchasing a TROP plan. As mentioned already, regular term plans do not offer any maturity benefits and hence have lower premium amounts. However, in TROP, because of the maturity/survival benefit, the premium amount is considerably higher. Typically, the premium amount for TROP plans is two to three times higher than that of a regular term plan. So you must consider the affordability of the payment terms before opting for it.
- No interest and inflation consideration: The TROP plan guarantees the return of all the premium amounts paid during the policy term as a survival benefit. However, you must consider the fact that the premiums paid do not incur any interest. Also, the survival benefit does not consider the inflation rate of the time. Consider the previous example; if Anil survives the 40-year term, at the age of 65, he will receive only the maturity benefit, i.e., INR 8 lakh, without any interest and inflation adjustment. So, while TROP is an excellent option to have, you must not make it your only investment option.
Another vital thing to consider here is to read the fine print while opting for TROP. Because some insurance companies offer a 100% refund of the premium, some might offer a reduced amount by deducting the initial month’s premium and taxes or simply provide 75% of the overall premium. Hence, read the terms and conditions carefully before purchasing the plan.
Just like a regular term plan, you are free to add different riders to broaden the scope of the TROP plan. However, you must note that the additional amount charged for the rider(s) does not qualify for a refund at the time of maturity benefit payout.
Term Plan vs. TROP Plan
As an insurance purchaser, it is essential to acquaint yourself with all the plans, their variants, and other necessary information. However, the primary factor of consideration should always be the safety and financial security of your dependents.
Here is a brief comparison between the regular term plan and term plan with return of premium option:
|Features||Regular Term Plan||Term Insurance with Return of Premium|
|Protection||Pure life cover with no survival benefit||Full life cover with a refund of total premium paid if the life assured survives the term.|
|Returns||Not applicable||Return of already paid premiums as the Survival benefit. No interest or inflation adjustments applicable.|
|Premium amount||0.1 percent of the total coverage||Generally, 2 to 3 times higher than a regular term policy. Also, the premium amount may differ from company to company|
|Tax Benefit||Tax benefit under Section 80C and Section 10 (10D) of the IT Act, 1960||Tax benefit under Section 80C and Section 10 (10D) of the IT Act, 1960.|
Term insurance is a perfect cover you can buy for the future financial security of your family. While purchasing TROP, do not only look at the maturity/survival benefit. Consider the coverage as well. You are paying a premium for financial security. Returns are secondary. You should also understand that each insurance policy offers different types of covers. Thus, it is essential to have a clear understanding of your financial objectives and future liabilities before availing of any insurance policy. Always consult a professional expert or your financial advisor before making any such personal financial planning-related decisions.