Choosing life insurance can turn out to be an overwhelming task. You hear terms so confusing that you start questioning if all your premium money would go down the drain in case nothing bad ever happens to you.
The very thought behind not purchasing such basic insurance plans discourages a significant chunk of the Indian population from getting a term plan at all. Who in their right mind would shell out money every year for 20 or 30 years only to have it vanish into thin air if they survive the policy tenure?
To counter this, insurance companies came up with the concept of a term insurance plan with a return of premium. What this means is that the policyholder gets his or her money back in case of survival till the end of the policy term. However, is this really the best option for ensuring lifetime financial protection for your loved ones, or would a simple plan suffice? Let us delve into a comprehensive yet easy-to-understand guide detailing the best option for your peace of mind.
Understanding Term Plan Insurance
Before understanding what a term insurance plan with return of premium really means, it is vital to understand what a pure term plan entails. As mentioned earlier, these plans can seem complicated, but, in reality, they are rather straightforward.
A pure term plan requires the policyholder to only pay a nominal amount of money (referred to as the premium) every year to the insurance company. In exchange for this, in case of an unfortunate incident occurring during the tenure of the plan, the company pays a large sum of money to the nominee of the policyholder. This money can help the nominee pay off expensive loans, such as those for a house or a car, or simply provide them with an income to help them get by financially.
What Is A Term Insurance Plan With Return Of Premium?
This, as the name suggests, is a term insurance plan that provides the policyholder with a return of premium. Simply put, this is a pure term plan insurance with a slight modification. In case of survival till the end of the policy term, the company refunds all the money that the policyholder had paid as the premium, deducting some amount for taxes and miscellaneous costs.
While this may seem like a win-win scenario for both the company and the customer, there are several drawbacks to such a plan, which we will discuss momentarily. To begin with, let us get a firm grasp of how this plan works.
As mentioned above, in case of the policyholder’s demise during the policy tenure, the nominee receives the sum assured from the insurance company. In case the policyholder survives, he or she receives a lump sum amount of all the premiums that he or she has paid to the company during the policy tenure, minus a minor amount for taxes and other expenses. It seems logical enough; however, there are several intricacies to this that we will explore now.
The Catch: Premiums Are Costly, And You Would Have Made More Money Yourself
The adage that there is no free lunch holds true for term insurance plans with a return of premium as well. In order to receive the benefits that come with such a plan, the policyholder must pay significantly more in premiums than he or she would have to for a pure term plan.
For example, if a standard term plan were to cost, say, 10,000 Rs every year, a return of premium plan for the same sum assured would cost anywhere between 20,000 and 25,000 Rs every year. While it is obvious that the money invested in the plan would be returned eventually, the amount of money that would have to be invested initially in return for the same sum assured would be unappealing to many.
Another factor that contributes to the catch in return of premium plans is inflation. The amount of money one possesses keeps losing value with time. For example, one hundred rupees today would be significantly more valuable than one hundred rupees thirty years from now. While the amount of money that would be returned to the policyholder upon the completion of the policy tenure would be the same, it would be considerably less valuable than the money that the policyholder had invested in premiums.
Had the policyholder instead invested that extra money that he or she would have to pay for the return of premium plan in a simple bank FD or mutual fund, it would have earned tremendously higher returns in thirty years than the same amount would in a return of premium plan.
Who Should Buy What?
While return of premium plans do seem to have a disadvantage over pure term plans, they can prove to be beneficial to some people. As mentioned previously, return of premium plans can cause the policyholder to pay twice or thrice the amount that he or she would for a pure term plan. Therefore, return of premium plans can be ideal for people who do not invest extra money wisely. For example, one might prefer a return of premium plan if he or she has a habit of emptying his or her bank account on frivolous purchases.
In such a scenario, a return of premium plan would compel the policyholder to invest the extra amount in the plan. Furthermore, people that like having the peace of mind afforded by having a sum of money to show for their investment in an insurance plan might also prefer return-of-premium plans.
Pure term plans, on the other hand, would be ideal for people with a tight budget. Pure term plans allow the policyholder to secure a large sum of money in case of an unfortunate incident at a low price.
Is a Return of Premium Plan Worth It?
Ultimately, is a return of premium plan really worth it for your family? Well, there is no straight yes or no answer to this question, as it depends on the individual’s spending and saving habits. If one is disciplined enough to save and invest the extra money that one would have to pay for a return of premium plan, it would be better to get a pure term plan and invest the extra money in something that would generate higher returns.
On the other hand, if one is aware that one would not be able to make good use of the extra money that one would have to invest in a return of premium plan, it would be better to stick to a return of premium plan. After all, the alternative to having a decent amount of life cover is having no life cover at all!