Term plans are a favored investment choice for a significant portion of the population in India. However, many individuals still lean towards purchasing Return of Premium (ROP) insurance policies such as ULIPs, Endowment plans, and Money Back plans. Nevertheless, when it comes to cost-effective life insurance plans, nothing can surpass a term plan in providing extensive coverage at a nominal premium.
Thus, term insurance plans are widely regarded as the best and most efficient insurance plans among all types of life insurance policies. With a basic term life plan, individuals can pay a nominal premium and obtain decent life coverage.
What are Return of Premium (ROP) plans?
In India, people generally dislike the idea of acquiring a term plan without the benefits of maturity. That's why insurance companies introduced the concept of term plans with a return of premium, which is a new variant of term insurance. Let's delve into how ROP plans work in comparison to basic term plans:
For instance, consider two individuals planning to purchase term plans. One of them opts for a basic term plan with a sum assured of INR 1 crore, while the other chooses a Return-of-Premium Term Plan with INR 1 crore coverage.
Now, in the unfortunate event of the policyholder's demise, both plans provide the nominee with the same amount as the sum assured for death benefit. However, if the policyholder survives the plan's duration, the basic term plan does not offer any refund, whereas the ROP plan returns the premiums paid over the years.
Clearly, the ROP plan appears more appealing to people as it allows them to recoup the premium at maturity. However, it's not as simple as it seems, especially in terms of the annual premium. The ROP plan, which provides maturity benefits, imposes significantly higher annual premiums on the policyholder and is much more expensive than simple term plans.
Differences in Premium between Simple Term Plans and Return of Premium Plans
The premium charged for return of premium term plans can be two to four times higher compared to basic term insurance plans. For instance:
Let's consider a 30-year-old non-smoking male planning to purchase a term insurance plan for INR 1 crore over a 30-year term. For a Simple Term Plan, he would pay an annual premium of INR 11,950 for 30 years. In the case of a term insurance plan with a return of premium, the annual premium would be INR 23,600 for 30 years.
Upon maturity, the individual receives the total premiums paid over 30 years, which amounts to INR 7.1 lakh in the case of the Return of Premium Plan. Therefore, the difference in premium amount cannot be disregarded when considering a term plan. Naturally, the disparity in maturity amounts is also a factor that cannot be ignored. This is why people are enticed to buy return of premium plans, hoping to receive something if they survive the plan. However, comparing the two plans based solely on this aspect is not the correct approach.
In the previous example, the individual purchasing a return of premium term plan would have to pay an additional INR 11,650 compared to the basic term insurance policy. Thus, if you survive the policy, you would pay INR 7.1 lakh extra and receive the same amount at maturity after 30 years.
This is because insurance companies only reimburse the premiums paid by the insured and not the sum assured if the person outlives the policy duration. Hence, you would only receive the premium amount you paid, which is INR 7.1 lakh. However, instead of buying a term plan with a return of premium, if you opt for a simple term policy with nominal charges and invest the remaining premium amount in another plan for 30 years, you would achieve better returns.
Let's examine the difference in value you might receive by investing the remaining premium amount of INR 11,650 in a different plan.
Value of the annual investment of the difference amount
Depending on the chosen investment option, the returns would vary:
If you invest in a plan offering 7% returns for 30 years with an annual investment of INR 11,600, you might receive INR 11.8 lakh at maturity.
At an 8% interest rate, you could receive INR 14.2 lakh at maturity. Similarly, with 9% returns, the amount would be INR 17.3 lakh, and at 10% returns, it would be INR 21.1 lakh.
As evident, there is a significant difference when you invest the difference in amount in an investment plan rather than using it to pay for your return of premium plan. Therefore, buying a return of premium plan is not advisable when compared to simple term plans.
While insurance agents may try to influence you to purchase a return-of-premium plan to earn a higher commission, it may not align with your long-term financial goals.
Conclusion
Return-of-premium plans are often referred to as “no cost plans” because you receive back the amount you invested as premiums. However, as discussed above, they may not be suitable for long-term investment gains. It is better to invest that amount in another plan to achieve better returns. In fact, ROP plans can be excessively costly for individuals in the long run. You can utilize a term plan calculator to assess the premium amount you would pay and the benefits you would receive, enabling you to determine which plan or investment suits you best.
