What’s The Deal About Zero-Cost Term Insurance Plans?
- Introduction
- Zero-Cost Term Insurance Plans - What Are They?
- How Do Zero-Cost Term Insurance Plans Work?
- Conditions Associated With Zero-Cost Term Insurance Plans
- Are Zero-Cost Term Insurance Plans Different From Return Of Premium Plans?
- 🧐The Beshak Take On Zero-Cost Term Plans
A regular term insurance plan is a pure risk protection plan, which means it gives your nominee the sum assured as the death benefit if you pass away during the policy term. It does not give you maturity value, i.e., you will not receive a single dime if you survive the policy term.
And so, many people think - “What’s the point of spending my money if I won’t get anything back?”
To address this very concern of customers, insurance companies have introduced Zero-Cost Term Insurance Plans.
What are Zero-Cost Term Insurance Plans? How do they work? Are they a good choice? Let’s find out - in this article! 👇
A zero-cost term insurance plan, as touted by various insurance companies, is actually an early exit/smart exit/special exit plan. It allows you to opt out of the plan while it is active. If you wish to opt out of the plan, you can do so during a specific time period set by the insurance company and you’ll get a refund of all the premiums you’ve paid up to that point.
When you buy a term insurance plan, you pick a policy term that aligns with the age at which you expect to be financially independent, i.e., when you have paid off all your loans/liabilities and have enough wealth to live the rest of your life. Your financial dependents will not need this extra layer of protection once you have enough money to take care of expenses - whether or not you’re around.
However, you may achieve financial independence earlier than expected, which eliminates the entire need of owning a term insurance plan.
For example:
Raj, a 35-year-old male, has recently purchased a house for which he has taken a loan of Rs 40 Lakhs. He also has 2 financial dependents - his wife and a 10-year-old son. He purchases a term insurance plan with a policy term of 30 years and a cover amount of Rs 70 Lakhs so his wife and son can repay the housing loan as well as take care of their financial needs (school fees, monthly bills, etc.) if he happens to pass away.
When Raj turns 50, his other investments give him high returns which he uses to pay off his housing loan. His son works at an MNC and isn’t financially dependent on Raj. So, Raj can now use his income to save up for his retirement and his spouse’s needs. He doesn’t require the term insurance plan anymore.
In such a scenario, paying premiums for the rest of the policy duration doesn’t make sense. Why would you invest your hard-earned money into a product you don’t need anymore?
But, if you stop paying the premiums for a regular term insurance plan - you don’t get anything back. On the other hand, if you own a zero-cost term insurance plan, you get all your premiums (net of GST) back when you withdraw from it.
However, it comes with a caveat - you need to exit the plan during the predefined time window. Not before, not after. This ‘time window’ varies from insurance company to insurance company. It usually is when you are closer to hitting 60, which is when you’re likely to be financially independent.
For instance, HDFC’s Life’s Click 2 Protect Super Plan offers you a withdrawal time window after the 30th policy year and before the last 5 policy years. So say you have bought the policy at age 30 up to age 75. You will have the option to withdraw and claim the premium refund between the age of 61 and 70 yrs. Not before, not after.
Apart from the predefined time window, zero-cost term insurance plans may come with other conditions -
👉The premium refund will be given as a lump sum amount. The total premium includes the base premium, extra underwriting premium, and loading for modal premium. It does not include rider premiums and taxes.
👉The exit option will not be available if you have chosen a Return of Premium term plan.
👉The policy will terminate after you receive the premium refund.
Different insurance companies may have different conditions. Here’s a comparative analysis of the conditions imposed by Max Life, HDFC Life, and Bajaj Allianz -
Yes. Zero-Cost Term Insurance Plans are an entirely different product. Here’s how they both compare -
Parameters | Zero-Cost Term Plans | Term Return of Premium Plans |
What are they? | Zero-cost term plans function like regular term plans, except that they allow you to exit the plan if you don't need it anymore. You get back the premiums (net of GST) if you exit the plan. | TROP plans offer a fixed sum as the death benefit to your nominee if you pass away during the policy duration. If you survive the policy duration, they offer a maturity benefit, i.e., you get back all the premiums you paid (net of GST). |
Premiums | They are the same as a regular term insurance plan. No extra charges. | The premiums are 1.5-2x higher than those of regular term insurance plans. |
When will the premiums be returned? | The premiums will be returned if you exit the plan during the specific time period set by the insurance company. | The premiums will be returned only if you survive the policy duration. |
Maturity Benefit | No | Yes |
Death Benefit | Yes | Yes |
Early Exit | Yes | No |
So, are zero-cost plans really what they seem? Let’s see!
In our opinion, zero-cost term insurance plans are not truly ‘zero-cost’ when assessed from a long-term lens. The math becomes very different if you take into consideration the time value of money. How?
When you withdraw from these plans you get what you’ve paid over the years and nothing more. You receive an aggregate of the paid premiums without any inflation or interest factored in. As we all know, the value of money decreases over time because of inflation, and the same amount will not hold the same value. 😮
Let’s look at an example to understand this better.
A 30-year-old non-smoker male buys a term insurance cover of Rs 1 crore for a period of 70 years. He opts for regular pay and is required to pay an annual premium of Rs 15,863 (inclusive of GST).
He decides to exit the plan when he’s 60 years old, i.e., 30 years after his purchase.
The premium refund he will receive (net of GST) = 13,443 x 30 = Rs 4,03,290. And, if you calculate the present value of this amount 30 years later at 6% - it will be just Rs 70,216 - which is well, almost ⅕ of the amount! 😮
So, our conclusion is -
👉There are no extra charges associated with these plans. So, they can be a good option for people who plan on retiring early.
👉If you plan on investing in a zero-cost term plan, understand the withdrawal window well. Set reminders so you don’t forget!
👉Go through the policy T&Cs carefully, since each insurance company may impose different conditions. Choose a plan only if you’re satisfied. Psst! Make this easier by talking to a Beshak Verified Advisor, who will explain each tiny detail and be there every step of the way - for free!
So, that was all about the latest product on the insurance block - Zero-Cost Term Insurance Plans. If you have any further questions related to these plans and how they work, you can post them on the Beshak Insurance Forum and get answers from vetted experts!
- A zero-cost term insurance plan functions like a regular term plan, except that it allows you to exit the plan if you don't need it anymore. If you exit the plan, you get back the premiums (minus taxes).
- You need to exit from the plan during the withdrawal window specified by the insurance company. Only then will you be eligible to get a premium refund.
- Insurance companies may also impose other conditions to be eligible for the refund.
- Zero-cost term insurance plans are different from term return of premium plans. TROPs give you premiums back (minus taxes) if you survive the policy term - at an extra charge.
- The amount you receive on exiting the plan after some years will not hold the same value, because of inflation.
- Zero-cost term plans are a good choice if you’re planning an early retirement.
- Go through the policy wording carefully to be aware of every tiny detail of the plan.
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