TROP works in exactly the same way as a Term Plan, in that it provides a death benefit to policyholder’s family. However, in addition, it also provides a maturity benefit in the form of repayment of all the premiums paid.
Insurance penetration in India is relatively low at ~3.69% of GDP, far below the rates in developing economies like China. At the same time, the importance of insurance in protecting us and safeguarding our families and property, cannot be emphasized enough. While lack of information contributes to this under-penetration, another factor that has a large impact on an individual’s decision to buy an insurance policy is an ability to perceive the benefits. This is especially relevant in the case of a life insurance policy, where the benefits are as such not tangible since they only accrue to the family after the death of the policyholder. Once the premium on a term life insurance policy is paid and the policyholder survives the term of the policy, then he/she gets no benefits and no returns. Term life insurance with return of premium plan (TROP) was specifically designed to cater to this requirement.
What is Term insurance with return of premium plan (TROP)?
In a pure term life insurance policy, the policyholder pays a certain premium amount to insure his life. In case of the policyholder’s demise during the term of the policy, the sum assured will be paid to the policyholder’s beneficiary. If the policyholder survives the term, then neither he nor his beneficiary receives any payment.
Now, a TROP works in exactly the same way as a Term Plan, in that it provides a death benefit to policyholder’s family. However, in addition, it also provides a maturity benefit in the form of repayment of all the premiums paid.
Let’s take an example; Consider that an individual has purchased a term insurance plan with a return of premium option for a Sum Assured of INR 1 crore at a premium of INR 25,000 per annum with a policy term of 30 years. In case of death within the policy period, the individual’s beneficiary will receive the Sum Assured of INR 1 crore. However, if the individual survives the policy period, he will still receive a maturity benefit – something that he would not have received in case of a regular term plan. This benefit would be equal to the premium paid over the policy term which is INR 7,50,000, in this case.
Is a TROP a win-win plan?
While it may seem that by purchasing a TROP you can have your cake and keep it too, you must assess it further to understand whether it meets your specific requirements. Some things to consider while buying a TROP:
- TROP plans also have a ‘paid-up’ option if you default on premium payments. In the event that you stop paying the premiums, normally after atleast three years, the policy will still continue but with reduced benefits. In most cases, the premium paid will be returned at maturity. However, the nominee will get a reduced sum assured if the insured dies.
- The premium paid for a TROP is almost always higher than the premium paid for a regular term plan. In some cases, it can be almost 3x higher. Thus, you need to first ensure that you can afford to pay the premium and secondly understand that the premium paid back to you does not earn any interest and is not adjusted for inflation. If you pay a premium of INR 7,50,000 over a period of 30 years, you will only get back INR 7,50,000. Some argue that one can purchase a regular term plan and invest the differential in premium to earn higher returns. It is also important to review the terms of the plan judiciously as the surrender benefits offered can differ from plan to plan. While some insurance companies offer to return the entire premium amount, there are otherS who provide reduced benefits by deducting the first month’s premium and taxes or paying only 75% of the total value of the premium received.
- A TROP does offer the option of rider benefits to enhance the coverage of the policy. However, it is important to note that the additional premium paid for the riders will not be refunded on maturity.
- Every insurance plan has different things to offer. It is important to assess the offer judiciously before purchasing a policy. Just remember that when it comes to purchasing a TROP, do not just consider the maturity benefit. The decision to purchase one type of plan over another should solely be based on your requirements and ability to pay the premium amount.
(By Dhirendra Mahyavanshi, Co-Founder, Turtlemint, An InsurTech Company)