Portfolio

‘What if I don’t die?’ Are Return of Premium plans, a better choice?

Rajalakshmi Nirmal | Updated on November 26, 2019

Agent protects family figures. Life Insurance policy on a desk.   -  istock.com/designer491

Not really. Buy a regular term plan and invest the balance amount in bank FD or PPF

Last week, an insurance agent approached me to sell a new policy in town. With a sparkle in his eyes, the agent said, “If you survive the policy term, the company will return the premiums you paid.”

I jumped up from my chair. An insurance policy for free? Sounds too good to be true, isn’t it?

Return of premium (ROP) term plans are popular insurance products and do have takers. That said, these don’t fit the bill for everyone. Here’s a look at things that you should know before giving in to the temptations of buying an ROP term plan and people who can consider this:

ROP term plans – What they are

An ROP life insurance policy is one where all premiums paid by the policyholder are returned to him/her if he/she survives the term of the policy. Some insurers promise to return even 110-150 per cent of the premiums paid. However, do note that the premium that will be returned will be what you paid for the base policy; premium paid on any rider opted on the cover will not be returned. And, unlike the regular term covers, these plans offer an option to make the policy paid-up – where you can stop paying the premium but the policy will continue to cover you till end of the policy term for a reduced sum assured (SA). Tax benefits available on regular life insurance policies under Section 80C can be availed on ROP term plans too. Maturity benefit, i.e., the premium that is returned, is eligible for tax exemption under Section 10 (10 D).

High cost structure

ROP term plans charge a high premium as they guarantee return of premium. For a 40-year male, a regular term plan of SA Rs 1 crore for 30 years will cost about ₹20,000, but if it is an ROP term plan, the premium will shoot up to ₹38,000-40,000. Also, though insurers promise to return all the premiums paid in ROP term plans, it does not include the tax (GST) you shelled out. So, when money comes back, it will be less than what you paid originally on the policy. Take, for instance, Exide Life Insurance’s Smart Term plan that’s promoted with the tag line – ‘zero cost term insurance’. The policy covers individuals of age 18-60 years for a maximum term of 30 years. If a male of 40 years wants to buy a 30-year term cover for SA of Rs 1 crore, the annual premium is ₹38,691. If he survives the 30-year term, he will get ₹11,10,750 in hand – which is lesser than the ₹11,60,730 he would have actually paid in 30 years. Similarly, if you take Max Life Term plan with ROP option, the premium for the same person works out to ₹31,768 annually. The policy at maturity after 30 years returns ₹9,11,000, again, less than the ₹9,53,040 that one would have paid in 30 years.

 

 

Now, if one actually had bought a pure term insurance plan and invested the balance in a bank FD, at the end of 30 years, he/she would have accumulated a big corpus.

Thus, the opportunity cost of returns one foregoes on the money invested in ROP term plans is high, says Kapil Mehta, Co-founder, www. securenow.in. Sample this:

Assuming a male of 40 years who wants to buy a term cover of SA ₹1 crore for 30 years. There are two options before him. One, buy an ROP term plan by shelling out about ₹40,000 as premium, and two, buy a regular term plan by paying ₹20,000 as annual premium and invest the balance ₹20,000 in a bank FD .

In option one, the investor, at maturity of the plan in 30 years, will get back about ₹12 lakh — which is just getting back the premium and ‘zero’ return.

In option two, assuming a post-tax return of 5 per cent in FD, the corpus at the end of 30 years will be ₹13.95 lakh.

If you invest in PPF (where maturity proceeds are tax-exempt), and make an average return of 6 per cent over 30 years, your corpus would be ₹16.76 lakh.

If the investment is in debt MFs, returns would be even higher. If investment is in equity mutual funds, the corpus would be even larger; of course, there is capital risk here which doesn’t make it an apple-to-apple comparison with ROP term plans.

Who should buy this?

ROP term plans are for HNIs who have bet on every other investment instrument in the market and now want a tax-free guaranteed product and are not eyeing returns. People who are not disciplined with investment and uncomfortable in investing by themselves, may also consider ROP term plans as the product doesn’t require one to monitor the investment constantly. Also, one need not fret over deciding where to re-invest the maturity proceeds every year.

Some insurers offer a combination of term plan and endowment insurance as a solution to compete against regular ROP plans but those gain are expensive.

Irrespective of its form, , an insurance plan where there is return of premium or a guaranteed maturity benefit, the cost will be high and returns not up to mark - sometimes not to beat even inflation. So think twice before you sign on the dotted line.

Published on November 25, 2019

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