A pure term insurance plan ensures that the death benefit in the form of sum assured is paid to the nominees if the life insured dies within the policy term.
The foremost objective of life insurance is to act as a tool in replacing one’s income in the event of the death of the bread earner in the family. And, it is best met through a term insurance plan which is a low-cost, high cover insurance plan. A pure term insurance plan ensures that the death benefit in the form of sum assured is paid to the nominees if the life insured dies within the policy term. If the policyholder survives and outlives the term, nothing gets paid as maturity proceeds. The premium paid in a term insurance plan, therefore, is primarily towards the cost of insurance or the mortality charge in the policy. As term plans do not have any maturity value similar to a car insurance policy, a lot of individuals have apprehensions towards it.
As an alternative, life insurance companies have a term plan that returns the premium paid over the years back to the policyholder. Such plans are called ‘Return of Premium’ plans.
In ‘Return of Premium’ plans, the premium paid by the policyholder is paid back on maturity. Noticeably, such as ‘Return of Premium’ plans will have a higher premium than a pure term plan. And, therein lies its biggest drawback. If one buys a pure term plan and keep investing the excess ( compared to Return of Premium plan) in any safe and assured investment, the maturity value will still be higher. This is because, in Return of Premium plans, the premium is generally paid without any interest. Effectively, the actual return therefore in Nil in Return of Premium plans. “By definition, ‘Return of Premium’ returns premiums paid and does not offer any (neither positive nor negative) returns ‘on’ the premiums paid,” says Sanjay Tiwari, Director-Product Management & Customer Services, Exide Life Insurance.
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For most, especially who are the first time buyers of term plans or those who are new to the concept of life protection, the premium paid in a term plan is considered as a sunk cost. “Term with ‘Return of Premium’ plans attract first-time life insurance buyers who are uncomfortable about getting no benefit for surviving the term and might see the premiums as a sunk investment. “Term with ‘Return of Premium’ plans attract first-time life insurance buyers who are uncomfortable about getting no benefit for surviving the term and might see the premiums as a sunk investment,” says Sanjay Tiwari, Director-Product Management & Customer Services, Exide Life Insurance.
Inspite of a negative return on surviving the term, ‘Return of Premium’ plans may suit some under specific situations. “Return of Premium’ term plans may also be suitable for occupations with irregular income as they offer proportionately reduced benefits in case of non-premium payment, unlike a term plan which will simply get lapsed. Since traditional India is prudent with day to day expenditure and is conscious of quantifiable returns on their money spent, such plans perfectly addresses their concerns,” says Tiwari.
Importantly, when it comes to the premium, the net premium after taking tax into account also has a role to play. The gross premium in both, a pure term plan and a Return of Premium plan depend on the buyer’s age, the term of the policy and the sum assured. After GST gets added, the net premium is what the policyholder has to pay to keep the policy active. “In fact, Term plan attract a higher 18 per cent GST whereas Return of Premium term plans attracts 4.5 per cent GST in the first year and 2.25 per cent GST thereon,” informs Tiwari.
Between the two, a pure term plan is a better option. Every life insurance plan has a mortality charge based on age, the sum assured etc. Adding a savings element does not absolve them from mortality charge. Term plans take only mortality charge ( and admin charge) and hence there is no maturity value. “Both plans have their attributes and customers are encouraged to purchase policies after identifying their life goals and then choosing the plans that are most relevant to them,” says Tiwari.