A term insurance plan with return of premium (TROP) is an attractive option for individuals seeking both life coverage and a potential return on their premiums. It is ideal for those who seek certainty over market-linked returns. However, these plans come with higher premiums, around 1.8x to 2x the cost of regular term plans, due to the inclusion of a maturity benefit.
Varun Agarwal, business head, Term Insurance, Policybazaar.com, says TROPs are gaining popularity as they guarantee the refund of the total premiums paid (excluding GST and sometimes rider premiums) if the policyholder outlives the policy term. “This guarantee of not losing the premium money is making these plans popular,” he says.
Higher pricing
In a regular term plan, individuals do not get any maturity benefit if they survive the policy period. However, in a TROP, they will get back all the premiums paid if they survive the policy period, which is usually 105% of the total premiums paid. Like a pure term plan, a TROP plan will offer death benefits to the policyholder’s family in the event of death.
In fact, TROPs are costly as insurance companies have to give back the premiums paid to the policyholder after maturity. In contrast, pure term plans only cover mortality risk (death), and the premiums are lower than TROPs. Policyholders need to determine whether the premium return component is justified, given the higher pricing.
Sarita Joshi, head of health and life insurance, Probus, an insurance broking firm, says these plans are priced higher than pure term plans based on factors such as current age, sum assured, lifestyle, and policy tenure. “They are two to three times more expensive than pure term plans for any given age group,” she says.
Adequate cover
An individual must factor in debt commitments, the number of dependents, and long-term financial goals to determine the coverage amount. Typically, it should be 15-20 times the individual’s annual income. Some individuals may need more coverage based on home mortgages, education obligations, or multiple dependents.
“One must consider the effects of inflation when calculating the coverage because the fixed amount of coverage will decrease significantly in value after several years,” says Joshi.
What to watch out for
Before deciding on a TROP, policyholders must know all the details about exclusions. Policyholders must ensure that the insurer has a high claims settlement ratio, as it indicates a better track record of the insurance company for settling claims, providing confidence in the insurer’s reliability.
Policyholders must check for plans that offer flexibility in terms of premium payment. The plan should allow for annual, half-yearly, quarterly, or monthly payment options to avoid a burden on the pocket. Like pure term plans, TROPs have additional features such as the waiver of premium benefit. In case of disability or critical illness, this feature ensures that future premiums are waived off, allowing the policy to continue without any financial strain.
In fact, TROPs have a special appeal for salaried employees seeking financial security and protection for their families. However, since the pricing is higher than that of a term plan, policyholders must ensure the plan offers an early exit strategy.