Unlike a pure term plan that provides only the death benefit as part of the coverage, a Term Plan with Return of Premium (TROP) pays out the total of all premiums paid during the policy period in case the policyholder survives the policy. Premium paid towards a life insurance policy is usually seen as an expense by some people as the insured does not get any money in case he survives the policy term. A TROP is a good alternative in such a scenario as one is guaranteed to receive the entire premium at the end of the policy term, making the proposition attractive.
Sabyasachi Sarkar, appointed actuary, Go Digit-Life Insurance said, “However, one needs to keep in mind that the premium of a TROP might be higher than the pure term plan. The proportionate amount of sum assured you get to the premium paid in a TROP could also be lower when compared to the pure term plan.”
For instance, Mr. A bought a TROP from a life insurance company. He is 25 years old and bought a TROP plan with a sum assured of Rs 1 crore for a premium paying term of 30 years and agreed to pay a premium of Rs 8,000 every year.
Scenario 1: Mr. A passes away seven years after buying the policy. In this case, the nominee will directly get the sum assured of Rs 1 crore.
Scenario 2: Mr. A continues to pay every single premium for a period of 30 years till he turns 55 and survives the policy. In this case, he paid a total premium of Rs 2.4 lakh (8,000X30) over a period of 30 years. As Mr. A survived the policy period, the insurance company will pay him Rs 4.5 lakh upon maturity of the policy.
“One should ideally consider buying a pure term plan as they are cheaper in comparison to TROP plans. One should also take into account the opportunity cost as one ends up paying a higher premium for the same sum assured in comparison to a pure-term plan. However, if one does not want to forgo the opportunity of a guaranteed return of premium, one can opt for a TROP plan,” says Sarkar.
Keep In Mind: Rishabh Garg, head of term insurance at Policybazaar.com, emphasized ROP is an attractive option for individuals seeking both life coverage and a potential return on their premiums. However, these plans typically come with higher premiums, around 1.8x to 2x the cost of regular term plans, due to the inclusion of a maturity benefit.
“Consequently, it is advisable to consider purchasing either a pure term plan or a zero-cost term insurance plan. Zero-cost term insurance plans offer a dual advantage by providing the option to receive paid premiums back while maintaining prices comparable to regular term plans. Zero-cost term insurance plans, specifically, allow policyholders a one-time exit option once financial obligations are met, entailing a refund of all paid premiums minus GST. In the unfortunate event of the policyholder's demise, the nominee receives the death benefit,” Garg said.
“Therefore, for those desiring a payout upon the survival of the policy term, the recommendation is to opt for a zero-cost term insurance plan, providing a balanced approach between coverage and potential premium returns,” Garg added.
Therefore, individuals considering ROP term insurance should carefully assess their financial situation, risk tolerance, and long-term goals. “While ROP policies offer the advantage of a potential premium refund and peace of mind for the insured, they require a long-term commitment and may not provide the best return on investment compared to other savings or investment alternatives. Ultimately, the decision to opt for return of premium term insurance depends on individual preferences, financial priorities, and the ability to afford higher premiums over the policy term,” Rakesh Goyal, director, Probus Insurance Broker said.
