Deven was planning to get term insurance for the financial security of his family. Being the sole breadwinner, he wanted his family to be financially secure even if he passed away. But Deven often used to wonder what would happen to the premiums paid out of his hard-earned money, if he outlived the term of the insurance policy. To get clarity on the matter, he went to meet his brother-in-law, a financial consultant. Deven’s brother-in-law told him that he could get term life insurance with return of the premium plan (So, if he outlived the term of the plan, he could get back the amount he had paid as premiums. Deven is now happy with his term insurance with return of premium plan.
What is a term insurance plan?
A Term Insurance is a specifically designed life insurance policy that protects an individual’s family and provides them financial security in case of unfortunate demise of the life insured.
- Term life insurance is the least expensive and probably the simplest form of life insurance which insures your life for a specific term, ranging from 1, 10, 20, even 30 years or more than that.
- Like most insurance plans, an individual pays a premium for the selected policy term to get life coverage in return.
- If the life assured passes away during that policy term, the nominee gets the death benefit as suggested in the plan.
- However, since it is a “pure-risk” cover - if the life assured survives till the end of the policy term no money is given back.
The premiums are calculated on the basis of various factors like age of the individual, health history, lifestyle habits, and so on. Moreover, life insurance companies often ask the individual to conduct a medical check-up prior to finalizing the policy.
What is term insurance with return of premium (TROP)?
Unlike “pure-risk” covering term plans, a TROP returns the premiums paid till maturity if the life insured survives till the end of the policy term. This is also called the term insurance with money back plan.
- If an individual has purchased a term plan of Rs 20 lakhs for a policy term of 10 years, for which the yearly premium is Rs 5,000. If the individual dies during the policy term of 10 years, then the family/the nominee will be paid an amount of Rs 20 lakhs.
- But if the individual survives throughout the policy term, a TROP plan will pay back the premium paid for the 10 years to the policyholder.
As a part of the TROP plan, some companies also provide the policyholder with the assistance of a personal advisor to guide the individual throughout the period of the policy.
Benefits of TROP plans
The following are the benefits of TROP plans:
- Assured Return of Premium: Under a term insurance with return of premium plan, one is entitled to receive the paid premium amount. An individual can receive up to 100% or 115% of the premiums paid; according to the terms of the specific plan. One must, however, note that the paid amount is excluding any taxes, rider premiums, modal loading or other underwriting premiums the individual might have paid. This is the foremost benefit of any TROP plan.
- A Financial Protection Tool: It is just a plan to protect your loved ones financially in you absence. Right from covering your loans, to help your family maintain the same lifestyle in your absence - it is a total safety net. Hence, it is also called as an income replacement tool. Since it is a risk-covering plan one must not expect to make money out of this plan. One must not confuse it with other investment tools.
- Flexibility in Choosing a Plan: In case of return of premium plan, one has the flexibility of selecting the term plan that makes the most sense for the individual’s particular situation. This is a major benefit of a TROP plan.
- Flexible Premium Payment Options: A term insurance with money back also comes with various options for premium payment, allowing policyholders to choose a payment plan which suits them the best. An individual can opt to pay for premiums on a monthly, quarterly, half yearly or even yearly basis. Many TROP plans come with a ‘paid-up’ option. This means that if the policyholder defaults on premium payments, or completely stops paying premium, the policy still continues with reduced benefits.
- Tax Benefits - Apart from providing a financial security cover to an individual’s family, the term insurance plan also offers tax-saving benefits under Section 80C of the Income Tax Act. Where, the premiums up to Rs 1.50 lakhs under Section 80 C are subject to tax benefits. Death benefit pay-outs to the nominee are eligible for tax benefits under Section 10(10)D. These tax benefits are subject to prevailing tax norms. Please note that tax rules are subject to change.
- Other Benefits: A major benefit of a TROP plan is that the premium money returned is completely tax-free, as it is not associated with income and is simply a refund of premiums instead. It acts like an automated savings plan which forces you to add to your savings every month. Some TROP plans also end up building cash value which you can take loans against. The loans have to be repaid or else the refund benefit is bound to be reduced by the borrowed amount.
Conclusion: A term insurance plan is an asset for every household. It helps protect against any unfortunate event by ensuring financial security even after the loss of the family’s breadwinner. The policyholder, however, should choose the best plan according to his unique requirements. A TROP plan provides several benefits, but is more expensive than normal term plans. You must read the details of the policies of different insurance companies, including the fine print before zeroing in a TROP Plan. You must also remember to purchase a term insurance plan or a term insurance with money back plan as early as possible, once you start earning. When you buy an insurance policy early, you can avail low premiums with a high coverage. Premiums go up with age.