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Why Return of Premium Plans Might Not Be The Best Idea?

Team Beshak
By Team Beshak
We breathe insurance :)
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Introduction

When you survive the policy term - you don’t get anything back! 

That’s the only disadvantage of term insurance and one of the biggest reasons why we are wary of it. We fear the premiums we pay will go down the drain if we live past the policy term. 

We obviously feel more secure if we invest in plans that give out returns. More so because of products that apparently ‘refund’ our invested money to us. One textbook example is a TROP plan or a Term Plan with Return of Premium. 

A TROP is basically a term insurance plan that gives you a maturity benefit. If you survive the policy term, you get a refund of all the premiums you have paid (excluding taxes). This seems quite enticing! 

But, does it have a catch?

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. 

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What are TROP plans? How do they work?

As discussed before, a TROP plan returns to you the premiums (minus any taxes) you have paid if you survive the policy term. 

You need to opt for this feature when you purchase the plan. It’s important to note that it cannot be added later. Now - in the case of your unfortunate demise during the policy term, your nominee will be given the cover amount. If, on the other hand, you outlive the policy term - you get back all the premiums you've paid (minus any taxes). 

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Regular term plan v/s TROP plan

While TROP plans come with a 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 PlanTerm Return Of Premium Plan
PremiumsVery easy on the pocket.Relatively higher.
BenefitsDeath benefit.Both death and maturity benefits.
Plan ReturnsYou receive nothing if you live past the policy term. You get a refund of the premiums you've paid (minus taxes) if you outlive the policy term.

Let’s take an example. 

Aman buys a term plan with a cover amount of INR 50 Lakhs with the return of premium option. The yearly premium is INR 10000 (without tax) to be paid for a policy period of 30 years. Let's have a look at how the payout will work for regular and TROP plans. 

 Regular Term PlanTerm Return Of Premium Plan
If Aman passes away during the policy termHis nominee will get the cover amount of INR 50 Lakhs.His nominee will receive the cover amount of INR 50 Lakhs.
If Aman lives past the policy termHe won’t be eligible to get any amount. The plan will terminate at maturity.He will receive the premiums paid for 30 years, i.e. INR 3 Lakhs (10,000 x 30)

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Do you get back the entire premium?

The answer is - no. You will not get back everything you've paid. 

Here's what you will receive -  

  • The premiums you paid for your base policy. 
  • Any extra underwriting premiums. These are charged by the insurance company depending on your health status, lifestyle habits, etc.
  • Modal loading premiums, i.e., the extra premium amounts that are imposed by the insurer if you pay the plan premium on a monthly, quarterly, or semi-annual basis.

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What is not given back?

Here is a list of things that you won't get under a TROP plan - 

  • The premiums for any riders you've added to the plan. However, there may be exceptions, like Bajaj Allianz Smart Protect Goal, etc.
  • Some insurers/plans may not give you the extra underwriting premiums (for example: PNB MetLife Mera Term Plan Plus)
  • Taxes on the premiums.

So, ensure that you talk to your insurance company and peruse the plan T&Cs diligently before buying a TROP plan. 

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2 reasons why TROP plans might not be a great investment

1️⃣ Comparatively larger premiums

The premiums you will need to pay for a TROP will be quite high as compared to regular term plans, almost 2-3x the amount! And so, in our opinion, you should consider investing in a regular term insurance plan and use the extra amount that you'd pay for a TROP to invest in a good financial avenue like mutual funds to get nice, compounded returns - in lieu of TROP plans.

A comparison of premiums for some insurance brands:

Insurer

Base plan premium (including tax)

TROP plan premium (including tax)

Difference in premium paid

Aditya Birla Sun Life

₹ 12,008

₹ 19,261

60.40%

Bajaj Allianz

₹ 9,022

₹ 16,586

83.84%

HDFC Life

₹ 13,499

₹ 34,685

156.94%

Max Life

₹ 11,466

₹ 22,641

97.46%

PNB Metlife

₹ 11,328

₹ 24,244

114.01%

Note: These premium amounts are taken on 27.02.23. They have been calculated for a 30-year-old, non-smoker male buying a cover amount of INR 1 Crore and opting for the regular premium payment option, up to the age of 60 years.

2️⃣ No interest or returns on the premiums you've paid

Another significant drawback of a TROP, from an investment perspective, is that you don't get any interest on the premiums refunded to you if you outlive the policy duration. And, the amount you will receive will not have inflation factored in. If you look at a metric known as the ‘time value of money’, you will see how an amount that you feel sufficient today will not hold the same value a few years later. 

A comparison of premiums you'll get back and the value they will hold:

Insurer

Expectation 

Reality (after considering yearly inflation of 6%)

Aditya Birla Sun Life

₹ 5,65,824

₹ 96,276

Bajaj Allianz

₹ 4,87,227 

₹ 82,904

HDFC Life

₹ 10,18,887

₹ 1,73,367

Max Life

₹ 6,65,107

₹ 1,13,168

PNB Metlife

₹ 7,12,182

₹ 1,21,181

Note: These premium amounts are taken on 27.02.23. They have been calculated for a 30-year-old, non-smoker male buying a cover amount of INR 1 Crore and opting for the regular premium payment option, up to the age of 60 years.

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Discontinuing your TROP plan during the policy term

Discontinuing your TROP plan during the policy term is known as surrender in technical terms. You may want to surrender the plan for a number of reasons like, you find the premiums to be too high, you've found a better plan, etc. 

In this case, you can - 

👉 Quit the plan and get the surrender value
On surrendering your TROP plan, you will stand to receive the applicable surrender value. You can use this money for other investments with better returns. 

Every insurer determines a surrender value factor, based on how many years your plan was active for. 

Surrender Value = Surrender Value Factor x Total Premiums You Have Paid 

(This formula may vary across insurers and products)

 

👉 Continue the plan on a reduced paid-up basis without paying any more premiums
If you opt for the RPU option, your plan will be converted to an RPU plan till the end of the policy term and you will not be required to pay any more premiums. 

So, in this case - 

  • If you pass away during the policy term, your nominee will receive a death benefit that will be proportionately reduced.
    Reduced Death Benefit = Total premiums paid for base plan / Total premiums payable under base plan) x Original Sum Assured 
     
  • If you outlive the policy term, you will receive the premiums you paid prior to the RPU conversion. 

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Summing up!
In our very honest opinion, TROP plans aren't a great investment avenue. They do refund your premiums and look good on paper, but you don't get any returns. Ideally, it is wise not to mix up both insurance and investment. Hence, we recommend keeping them separate and not going for a product that offers both. As discussed before, you should consider investing in a regular term insurance plan and use the additional money you'd pay for a TROP plan to invest in good financial avenues like mutual funds to get better returns.


Got a question you’d like to get clarified? 

You can post it on the Beshak Insurance Forum - and get answers from vetted experts, for free! 

Key takeaways
  1. A TROP plan offers you a maturity benefit in case you survive the term of the policy, in addition to offering a death benefit, in case your death occurs. 
  2. All the premiums that you paid over the policy tenure will be returned, at the time of maturity if you outlive the policy.
  3. 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. 
  4. You can opt for the return of premium option only at the time of buying the term insurance plan.
  5. Under TROP plans, you get back the base plan premiums and modal loading premiums.
  6. 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. 
  7. 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. 
  8. 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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Team Beshak
Team Beshak, We breathe insurance :)

We are a group of young members of the Beshak community. We come together to brainstorm, write relevant and useful content for people (just like us) who want to figure insurance on their own. If you too want to share inputs/write for us - send us a "hey" to info@beshak.org

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