When it comes to securing the future of your family, a term life insurance policy is usually the very first thing that comes to mind. It is cost-effective and straightforward, and provides you with peace of mind because you know that your loved ones will be well taken care of financially in case something untimely happens to you. All individuals opt for term plans since they offer maximum coverage at minimum premiums, making them suitable for young couples, working professionals, or anyone who wants good protection without paying through the nose.
But all term plans are not the same. Some have a unique feature known as return of premium term life insurance. It guarantees to pay back all the premiums you have paid at the end of the policy term, provided you outlive the term. So, is this feature worth paying extra for? Let's find out.
What is Return of Premium Term Life Insurance?
A return of premium term life insurance plan functions similarly to a regular term policy, but with a slight difference. In a typical term policy, if you outlive the term, you don't receive any money back. You only receive the life cover for the period of the policy. But in a return of premium policy, if you outlive the entire term, the insurer returns all your premiums that you have paid.
For instance, if you purchase a term plan for 20 years and pay ₹5,000 annually, you will pay ₹1 lakh over a period of 20 years. If you live the 20 years, the insurer pays back that ₹1 lakh to you. Most people regard this as a "forced saving" plan since it returns your money to you while insuring you.
How Is It Different from a Normal Term Plan?
Here's the big difference: premium price. Return of premium policies cost more than standard term policies. The variation can range from 30% to 100% more, based on your age, term, and coverage. This is higher because the insurance company must absorb both the risk of paying out your death benefit and the additional money you will receive if you live. So although you do end up getting your premiums back, you are paying more in the first place for this benefit.
On the contrary, a term plan is inexpensive. That is, you might utilize the premium savings on other investments, such as mutual funds, fixed deposits, or retirement schemes. In certain situations, these investments will yield more than the premium amount returned by a return of premium plan.
Advantages of Return of Premium Plans
- Peace of mind: You can feel better knowing you'll receive all your premiums back. Even if nothing ever happens, your money isn't "wasted."
- Encourages long-term protection: Because it pays out at the end, most people won't cut off their term plans prematurely, thinking it's "wasted money." Return of premium plans encourage you to keep the policy running till the end.
- Simple savings mechanism: It is like a combination of insurance and savings. You pay premiums, are kept safe, and receive your money back.
Disadvantages of Return of Premium Plans
- Increased cost: This is the largest drawback. Shelling out more money for the same cover is difficult, particularly if you have other financial objectives.
- Inflation effect: What you receive at the end of the term might be less valuable because of inflation. ₹1 lakh now might have less purchasing power in 20 years.
- Opportunity cost: Additional premiums you pay might have been invested elsewhere and given a better return.
- Limited flexibility: Certain plans have rigid premium and term rules. Missing premium payments or canceling the policy prematurely might lower or eliminate the benefits.
Who Should Consider a Return of Premium Plan?
- Return of premium term plans are not for all. They best suit:
- Individuals who prioritize certainty over returns: If the return of your money is more important than possibly earning more with investments, this plan may be suitable for you.
- Those with low risk appetite: There are some individuals who do not wish to risk their premiums, even for insurance cover.
- Long-term savers: If you desire a disciplined method of savings without compromising insurance cover, this plan can be used for long-term financial planning.
But if you feel at ease investing your money elsewhere or would prefer to get the maximum coverage at less expense, a conventional term plan could be a better option.
Things to Check Before Purchasing
- Amount of coverage: Ensure that the sum assured is sufficient to provide for your family's expenses. An expensive return of premium plan could provide lesser coverage within the same budget than a conventional plan.
- Policy term: The longer the term, the more expensive the premiums. Consider carefully how long you'll need coverage.
- Premium affordability: Although you're refunded your money, the more expensive premium shouldn't be a stretch for your monthly budget.
- Insurance company reputation: Review the company's record for settling claims. The guarantee of refunding premiums is worthless if the insurer is not dependable.
Add-ons and riders: Certain plans provide additional covers such as critical illness cover or accidental death cover. These can provide added protection but cost extra.
Return of Premium vs Other Investment Options
Another way to decide if a return of premium policy is worth it is to compare it to other means of investing the extra amount. For example, if a term plan costs ₹5,000 annually and a return of premium plan costs ₹10,000 annually. In 20 years, you will pay ₹2 lakh more for the return of the premium plan. If you had invested the extra ₹5,000 annually in a 10% return mutual fund, you might end up with much more than the returned premium. This indicates that although return of premium policies provide security and guarantees; they may not necessarily be the best for creating wealth.
Real-Life Example
Let's consider a simple example.
- Normal term plan: ₹5,000/year for 20 years, sum assured ₹50 lakh. Total amount incurred: ₹1 lakh. Coverage is for 20 years. If you are alive, nothing is returned to you.
- Return of premium plan: ₹10,000 annually for 20 years, sum assured ₹50 lakh. Amount spent: ₹2 lakh. If you are alive, you receive ₹2 lakh back.
In this case, you are paying ₹1 lakh extra for the mere return of your premiums. If your intention is financial protection for your dependents, the standard plan is more cost-effective. If your intention is certainty and peace of mind, the return of the premium plan may be appealing.
Conclusion: Are They Worth It?
A return of premium A term life insurance policy can prove to be a good choice for those who are not fond of uncertainty and wish to have a guaranteed return of premiums and still be covered. It provides peace of mind, promotes long-term coverage, and is an easy method of saving. But it is more expensive. If maximum protection for your family at the lowest cost is your priority, a standard term life insurance policy might better suit your needs. Moreover, if you're willing to invest elsewhere, you might receive better returns than you would from premiums paid by the insurer.
Ultimately, the decision is yours based on your priorities: security and sureness or greater coverage and investment manoeuvrability. Compare plans diligently, examine premium affordability, and verify that the insurance company is reputable. Employing online term life insurance plan calculators can aid you in estimating premiums and coverage to make a decision. Keep in mind, the best insurance policy is one that suits your individual needs, budget, and long-term objectives. Whether you opt for a standard term policy or a return of premium policy, the key is to remain covered and secure your family's financial future.
