Why Return of Premium Plans Might Not Be The Best Idea?
When you survive the policy term - you don’t get anything back!
That’s the only drawback of term insurance and one major reason why a lot of us refrain from investing in it. We fear that our premiums are ‘wasted’ if we survive the policy term.
Even today, many of us prefer investing in products that pay us back. We are uncomfortable parting with our money especially when we’re constantly hearing of options that seemingly ‘pay us back with a guarantee’.
One textbook example of such a product is a TROP plan or a Term Plan with Return of Premium. As the name says - it is a term insurance plan that comes with an additional benefit - you get back all the premiums you paid (minus the taxes) if you outlive the policy term - as a survival or maturity benefit. At face value - this seems very interesting - you pay premiums to get a term cover, but at the end of the term will get all the premiums back. Best of both worlds right?
Well, that’s what we set out to find in this article. We’ll look at all the benefits and drawbacks that come with TROP plans, and help you assess if they are actually good for you - or a marketing gimmick that’s against your best interests. Let’s find out.
What are TROP plans, and how do they work?
Basically, you opt for the return of premium option at the time of policy purchase. (It’s important to note that It cannot be added at a later stage.)
Now - if you pass away during the policy term, your family will be paid the sum assured, and in case you survive the policy term, you’ll get all your premiums back (minus the taxes).
Some basic differences between a regular term plan and a TROP plan
While TROP plans come with a survival or maturity benefit, regular term insurance plans only offer a death benefit - meaning, the claim will be paid only if you pass away during the policy term.
Let’s quickly look at some differences between both these types of term plans.
|Regular Term Insurance Plan||Term Return Of Premium Plan|
|Cost||The premiums of a term insurance plan are very cheap.||The premiums of TROP plans are comparatively higher.|
|Benefit||A term insurance plan offers only a death benefit.||A TROP plan offers both death and survival benefits.|
|Returns||If you survive the policy duration, a term insurance plan doesn't pay anything back.||A TROP plan will return all your premiums if you survive the policy duration.|
Let’s take an example.
Say you take a policy of INR 1 Crore with the return of premium option with an annual premium of INR 25000 (exclusive of tax) for 40 years. Let’s see how the payout will be done, in the case of both the regular term plan and TROP plan.
|Regular Term Insurance Plan||Term Return Of Premium Plan|
|If you die during the policy term||Your nominee will receive a sum of INR 1 Crore.||Your nominee will receive a sum of INR 1 Crore.|
|If you survive the policy term||You won’t get anything back.||You will get back the premiums paid, i.e. INR 10 Lakhs (25,000 x 40)|
What parts of the premiums do you get back?
Not everything you pay is really returned. Here are the things that are paid back when you choose a TROP plan.
- Base plan premiums that you paid during the policy term.
- Additional underwriting premiums (extra premium requested by the insurer on the basis of medical reports, health, habits, etc.) are usually returned.
- Modal loading premiums - additional premiums charged when you choose to pay the premiums in monthly, quarterly, or half-yearly mode instead of annual mode, are usually returned.
What is not returned?
- Rider premiums are usually not returned (There are some exceptions to this, for example - Eg. Bajaj Allianz Smart Protect Goal)
- Some products do not return additional underwriting premiums charged (for example: eg. PNB MetLife Mera Term Plan Plus)
- Any taxes on the premiums you’ve paid.
Therefore, make sure you check with the insurer and go through the terms and conditions carefully before you invest in a TROP plan.
Why TROP plans might not be a great investment?
Here are two reasons why TROP plans might not be the right plan to invest in.
1️⃣ Higher premium
The premiums of TROP plans are much higher compared to pure term insurance plans. Sometimes, the premiums can be twice or thrice the premium of a regular term insurance policy.
Here’s an example. For a 30-year old, non-smoker male taking a cover of INR 1 Crore (Lump sum payout) with a Regular premium payment option, up to an age of 65 years, the premium of a regular term plan from a popular insurance brand is around INR 10930. However, if he buys the same plan, from the same insurer with the return of premium option, he pays an annual premium of around INR 19845.
So, instead of investing in TROP plans, it would be better to invest the balance amount in any other investment product through a SIP (Systematic Investment Plan) or SWP (Systematic Withdrawal Plan) and earn a compounded return on your investments.
2️⃣ No returns on premium paid
If you survive the term, the premiums that you get back are returned to you without any interest. Plus, the amount is not adjusted for inflation. So, when you take into account the time value of money when calculating the premiums, you’ll understand how the value of money reduces over time.
Let’s understand this better with the help of NPV (Net Present Value) calculation of all the premiums you pay over time.
30-year-old, male, non-smoker, 1 Crore cover, up to 65 Years, regular pay
|Sum Assured||Annual Premium (without tax)|
|Total Premiums paid that will be returned||₹5,57,935|
Note: Premiums mentioned above were taken as an example, and are not exact premium values.
So, you pay total premiums of INR 5,57,935 which you get back (minus the taxes) if you survive the policy term but the actual value of that money is reduced to INR 2,44,984, as a result of inflation.
Hence, a TROP plan is not a worthy investment option to go for.
What happens if you stop the TROP plan in the middle of the term?
If you want to discontinue the plan or are unable to pay the expensive premiums, you can surrender the TROP plan. You’ll have two options if you decide to do so -
1- You can take the surrender value and stop the policy.
If you surrender the TROP plan in the middle of the term, a surrender value will be applicable under the policy. A surrender value factor (SV factor) is defined by every insurance company - it depends on the number of years your policy was active. This SV factor is multiplied by the total premiums paid to determine the surrender value.
Please Note: The formula and factors to calculate the surrender value can be different for different insurers/products.
Under this option, the insurance company will calculate and pay you the surrender value, and then you can terminate the policy altogether. A benefit of getting the surrender value as a lump sum is that this amount can be used to invest in some other investment product and yield better returns.
2- You can continue the policy as a reduced paid-up policy till the end of the term without paying any premiums.
In a reduced paid-up policy, you can continue the term cover without paying any future premiums - but the death benefit applicable under the policy will be reduced proportionately as per the formula - (Total premiums paid for base policy / Total premiums payable under the base policy) * Sum Assured applicable before policy moved to RPU.
If you choose to continue the policy as a reduced paid-up policy, the reduced benefit will be paid to your nominee if you pass away during the policy term. And if you survive the term, you will get back all the premiums you paid before the policy was converted to a reduced paid-up policy. Make sure you go through all the terms and conditions of the policy thoroughly, before opting for this.
Plans that look like TROP, but are not.
There are a lot of term insurance plans available in the market today that provide a maturity benefit if you survive the entire term. However, they are not the same as the return of premium plans. Examples of such plans are -
- ICICI Prudential iProtect Smart Money Back Plan is a combination of term insurance and money back plan. Under this plan, you get the benefit of a pure term plan as well as the benefit of a money-back plan.
- Aegon Life iTerm Plan Dual Protect Option is a plan that provides a maturity benefit. In this plan, you will get 5% of the base sum assured as a lump sum on policy anniversary at the age of 60 years and a regular income of 0.1% of the base sum assured every month in arrears till death or maturity, whichever is earlier.
- HDFC Life Click 2 Protect Life Income Plus Option is another plan that provides a maturity benefit. Until the maturity of the policy, you will get 0.1% of the base sum assured as a regular income every month, from the age of 60 years. On the maturity of the policy, the remaining sum assured will be paid to you as a lump sum.
TROP plans give you your money back if you survive the policy term, but you don’t earn any returns on the money paid. Ideally, it is wise not to mix up both insurance and investment. Hence, we recommend that you keep them separate and don’t go for a product that offers both. Buy a regular term insurance cover that is adequate for your family, and invest the remaining amount in other investment avenues that will give you better returns.
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- A TROP plan offers you a survival benefit in case you survive the term of the policy, in addition to offering a death benefit, in case your death occurs.
- All the premiums that you paid over the policy tenure will be returned, at the time of maturity if you outlive the policy.
- A TROP plan is costlier than a regular term insurance plan and unaffordable for many and the premium does not earn any interest and is not adjusted for inflation.
- You can opt for the return of premium option only at the time of buying the term insurance plan.
- Under TROP plans, you get back the base plan premiums and modal loading premiums.
- Rider and additional underwriting premiums might or might not be returned depending on the plan you choose. You don’t get back the taxes on the premiums paid.
- In case you decide to surrender the TROP plan, you’ll have two options - get the surrender value and terminate the policy or continue the policy with a reduced benefit till the end of the policy term without paying any premiums.
- We recommend that you buy a good term cover for your family and invest all the additional money in an investment product that will give you better returns.
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