how return of premium term plans work

Tony, who is 35 years old, bought a 30-year pure term life insurance policy. He pays an annual premium of Rs. 12000. He ends up paying Rs.3,60,000 over the duration of the policy and he gets zero in return if he outlives the policy term. On the other hand, his good friend Greg bought a 30-year term policy with return of premium (TROP). He pays a higher yearly premium of Rs.20,000 and ends up paying Rs. 6,00,000 over the course of the policy term, all of which comes back to him if he outlives the policy period. While TROP returns premiums paid if the insured outlives the policy term, it is important to decide whether recovering this amount is worth the additional premium the insured pays.

Tony Greg
35 years 35 years
30 year term policy 30 year term policy
Return of Premium: NO Return of Premium: YES
Rs. 12,000 yearly premium Rs. 20,000 yearly premium
Total premium paid by end of policy: Rs. 3,60,000 Total premium paid by end of policy: Rs. 6,00,000
NIL amount if he outlives the policy Rs.6,00,000 if he outlives the policy

A term plan with return of premium promises to refund the premiums paid if the insured outlives the policy term. It is a convincing proposition for insureds who might be dissatisfied with no returns on a term insurance for all those premiums paid during the policy period. Here are some features of TROP that offer a comprehensive guide into its working:

Entry and Maturity Age: Different insurers offer different entry and maturity ages for their TROPs. Most insurers offer a maturity age below 70 years, while a few even allow for a maturity age above 70 years. People looking to purchase a term plan with return of premium must ensure that they purchase the cover required for them until a certain needed age. For instance, opting for 15-year TROP at 55 years of age when maturity age for the policy is 65 years does not serve any purpose. Instead, a 10-year TROP shall suit the insured’s needs.

Tenure: Unlike the conventional term policies that provide a cover to last for an individual’s lifetime, a term plan with return of premium lasts for only a certain period varying in multiples of five years until thirty years.

Payment Options: The term plans with return of premium offer flexible payment options customized to suit the insured’s needs, and each of these options has its own advantages. The standard premium payment options available are monthly, quarterly, half-yearly, and yearly. Insureds can also choose between paying a one-time lump sum as premium, or pay a premium for a few years, and get covered for the entire policy term.

Death Benefit: The insurer pays the nominee a sum assured as death benefit in the event of the insured’s demise. Various insurers follow varied methods of calculating the death benefit.

Survival/Maturity Benefit: For a simple TROP, the insured gets back all the premiums paid if he outlives the policy term. In some cases, few insurers pay an accrued bonus along with all the premiums paid, if certain conditions are fulfilled. The returned premium amount remains tax exempt.

Surrender value: The surrender value of the TROP varies with the type of premium payment. Different insurers calculate the surrender value of TROP differently and as a general rule of thumb, paying a one-time lump sum amount at the time of policy purchase allows for a greater surrender value. In cases of mid-term surrender, the surrender value shall be equal to premiums paid thus far minus a predefined fee.

Paid up Value: If the insured is unable to continue paying the premiums, the policy shall not terminate. Instead, the policy cover shall be reduced until the end of the policy term, provided the insured has paid premiums for a given number of years, as decided by the insurer.

Riders: Several riders like critical illness rider, accidental death rider, and cash hospitalization riders can be coupled with the main TROP, to avail the rider benefits.

To sum it up, the term plan with return of premium offers death benefit, and refund of all premiums paid, provided the insured outlives the policy term. It works like a savings plan compelling the insured to add to his monthly or annual savings. On the other hand, it is a complete value for money, promising guaranteed cash returns. Although the TROP premiums are a bit higher in comparison to a simple term plan, the benefits far outweigh the costs in helping the insured to protect his loved ones in his absence.