Life insurance: term plan with non-viable premium refund

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However, term insurance products themselves can be of different types.

Having adequate life insurance protection in place is a necessity these days. It ensures that dependent family members are not left behind in the event of disability or sudden disappearance of the insured. Having said that, it is always wiser to separate insurance and investing. As such, it might be a better idea to go for a standard term insurance policy than traditional life insurance products like endowment plans which offer a relatively lower sum insured at higher premiums. The funds saved by choosing a term insurance policy can be invested according to return expectations and risk tolerance to achieve higher overall returns.

However, term insurance products themselves can be of different types. There are simple term plans and also a few variations that return the premium at the end of the term of the contract. So, should you go? Let’s discuss the characteristics of a Term Plan and a Term Premium Return (TROP) plan to find the answer.

Term plan and term plan with premium refund
A term plan provides lifetime coverage for a number of years. The premium for a term plan is determined based on the age of the insured and the size of the policy coverage, among other factors. These premiums are generally lower than those for most other life insurance products because there are no maturity benefits or investment costs for the insurer involved. Term plans are available in different variations depending on the type of premiums and claim payments.

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Typically, you can choose the premium payment frequency to be monthly, quarterly, annually, lump sum at a time or for a certain period. Likewise, there are different payment plans like fixed monthly payment plan, increasing monthly payment plan, lump sum payment, etc. You can choose a term plan based on these two factors depending on the needs of your dependent family members. You can also include rider options in your term plan at the time of purchase to make it more comprehensive, although this can make it more expensive.

A term plan with return of premiums (TROP), on the other hand, is a term plan with the added feature of a survivor benefit. This implies that if you, as the insured, survive until the TROP expires, you will recover the entire premium. You can also get a loan against a TOO policy based on its paid-up value and subject to applicable conditions and under the policy – which is not possible with a standard term plan.
You can also pay the premiums for a TROP in installments or all at once at the start of the policy. However, the premium for a TROP is higher than a standard term plan for the same sum insured. This is because the cost associated with TROP, whether it is the cost of investing premiums or administering the policy, is higher than a vanilla insurance policy.

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Which one should you go for?
TROPs are often advertised as “free life insurance policies” to attract buyers by showing that the insured has nothing to pay if they survive the term of the policy. However, the reality could be a little more complicated. In fact, TROPs usually involve much larger premium obligations than a term plan of the same hedge size. Also, the actual value of the premium amount returned at the end of the policy term under a TOO will be much lower due to inflation. Thus, the difference in premiums for a term plan and an equal sum insured TROP could instead be invested in instruments aligned with the insurer’s risk appetite to constitute a much larger corpus.

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It’s not uncommon for people to invest in TOOs as a last minute tax saving measure without giving it much thought. It might be better to buy a standard term insurance product for an adequate sum insured at lower premiums. Surplus funds can be invested in ELSS Mutual Funds, Tax Saving FDs, PPFs, NPSs or VPFs depending on your risk appetite and liquidity needs to build a larger body. while helping you to exhaust the tax deduction benefits available to you.

The writer is CEO of BankBazaar.com

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