Term vs. Term Return of Premium: Elementary maths your school teacher always said you would apply in life

Having heard so much about Term Insurance and why it’s so important to have one, you’ve decided to go ahead and insure yourself. But while doing some research on the products available in the market, you’ve come across this variant called Term with Return of Premium (TRoP) and it really appeals to you. After all, it provides you the best of both worlds – not only does it insure you and provides financial protection to your family in case you die but also promises to pay you back your premiums if you survive till the end of the policy term. No doubt, it seems like a win-win proposition but it may not always be true.

You need to make sure that you’ve considered the math behind the proposition. While the feature of ‘return of premiums’ may seem attractive, do bear in mind that this makes the product more expensive than pure Term Insurance Plans (without any return of premium) and depending on the premium being charged may not really be beneficial.

Take an example of a 35 year old male taking an insurance cover of Rs. 20,00,000 for a term of 20 years. Let us assume his premium for a Term Insurance plan is Rs. 6,000 and for a TRoP plan is Rs. 17,000 (an example that is fairly close to two such products available in the market today).

In both cases, the risk cover on his life is the same i.e. Rs. 20,00,000 (the amount that would be paid to his dependents in the case of his death). However, if he buys the Term plan, he ends up paying Rs. 6,000 every year for 20 years with no survival benefits while in case of TRoP he pays a higher Rs. 17,000 every year but gets back Rs. 3,40,000 at the end of the 20 year period (17,000 times 20).

Now the simple math:

Since there is an additional Rs. 11,000 (17,000 minus 6,000) that our friend is paying every year when choosing a TRoP, this choice can only make sense if he cannot deploy this additional amount elsewhere to earn more than Rs. 3,40,000 in 20 years.

Rs. 11,000 invested at a minimal rate of 4.5% can fetch an amount greater than Rs. 3,40,000 in 20 years time. Don’t know about our friend but most of us could safely park our money where it could earn more than 4.5% per annum.

That’s all there is to it, really. One just needs to make sure that the opportunity loss on the extra premium under TRoP is not higher than what will come back to you as return of premium.

Look at the extra amount you have to pay for a TRoP and consider various alternate investment options available for this money. If these options give you a return that is lower than what you would get through the ‘return of premiums’, do consider TRoP but if not, then stick with the good old Term Insurance plans.