Life Insurance (2)
This variant of term plans offers a survival benefit in the form of premiums paid by the policyholder during the term of the policy being returned at the end of the policy term. While this feature may seem attractive, one needs to bear in mind that by virtue of having this feature these plans are more expensive than Term plans and may not be as beneficial as taking a stand alone Term plan together with investing the amount you would save on the reduced premiums.
• Term Return of Premium (TRoP) plans is a variant of Term Insurance that not only offer financial protection but also return your premium in case you survive the term of the policy. While this feature of ‘return of premiums’ may seem attractive, one should 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 or 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).
• Since there is an additional Rs. 11,000 (17,000 minus 6,000) that is being paid every year when choosing a TRoP, this choice can only make sense if one 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.
• One needs to make sure that the opportunity loss on the extra premium under TRoP is not higher than what will come back as return of premium.
• When choosing between the two, consider various alternate investment options available for the extra amount you are paying for a TRoP. If these options give a return that is lower than what you would get through the ‘return of premiums’, do consider TRoP but if not, then Term Insurance plans should be the preferred option.