Which is the best term plan with return of premium (TROP) ? Which is the best term plan with Maturity Benefits?
The answer to this question is ‘none’.
If you want to know the reason behind the answer, you’ve come to the right place.
But before that, let us understand what a term plan is all about.
Term Plan
A term plan is a life insurance plan that provides you with a certain amount of coverage for a specified time period. If the insured dies in between the tenure of the policy, a sum assured (death benefit) is paid. On the other hand, if the insured survives the term of the policy, no benefit is paid. Ideally, a term insurance plan does not offer any maturity benefits.
In this case, insured is a person who has purchased the term plan (policyholder) whereas sum assured is the amount of coverage and tenure is the specified time period for which the insured has taken the policy.
A term plan is undoubtedly the best life insurance product available at the moment. Despite the fact, many life insurance companies have introduced a similar variant known as ‘term plan with return of premium’, i.e., TROP. The prime reason behind the launch of this variant is the psychology of Indian consumers.
Indian consumers have a knack for capital protection. They cannot afford to lose their hard-earned money no matter what happens. Life insurance companies are completely aware of this psychology; hence a variant of term plan was introduced, which is term plan with maturity benefits, to encourage consumers to buy the policy.
Term Plan with Return of Premium (TROP)
All the features of this variant are the same as the original term plan except the fixed premium return that you will get if you survive the tenure of the policy. In simple words, this variant plan comes with maturity benefits.
If the insured dies in between the tenure of the policy, the sum assured is paid. But, if the insured survives the term of the policy, all the premiums are returned back.
Coming back to the main question of this article – that is “why you should not go for a term plan with return of premium (TROP)”? Let’s take a clear example in order to justify the answer and put things into perspective.
Ajay is 35 years old working professional who wants to purchase a term insurance plan. He has zeroed down on the sum assured of 1 Crore. Since Ajay wants to work only till the age of 60, he has decided to take a term insurance plan for a time period of 25 years.
But Ajay is confused whether he should go for a pure vanilla term plan of 1 Crore or a sum assured of 1 Crore with premium return options. Since Ajay was unsure, he decided to consult a fee-only financial planner to clarify his doubts regarding the term plans.
His financial planner asked him to do a comparison between the premiums of both the plans. After selecting 2-3 life insurance companies, Ajay compared the premium of the normal term plan and the term plan with maturity benefits.
| Term Plan (Age -35 Years, Tenure -25 Years, Sum Assured -1 Crore) |
|
|
Name of the Plan |
Premium per annum in thousand |
| IPRU iProtect smart | 15,457 |
| HDFC Life 3D Life Plus | 15,421 |
| Tata AIA Sampoorna Raksha | 12154 |
| Term Plan with Return of Premium (Age -35 Years, Tenure -25 Years, Sum Assured -1 Crore) |
|
| Name of the Plan | Premium per annum in thousand |
| IPRU iProtect smart money back | 26,087 |
| HDFC Life Return of Premium | 33,404 |
| Tata AIA Sampoorna Raksha+ | 25812 |
Upon making the comparison, Ajay realized that term plans with maturity benefits are at least 70% costlier. Moreover, he found out that in insurance companies such as HDFC life and TATA AIA, the premium is more than double the amount. Taking all the important factors into consideration, Ajay decided to go for ICICI Prudential iProtect smart money back term insurance plan.
Term Insurance with Maturity Benefits
Secondly, his financial planner asked him to calculate the loss that would be incurred if he dies before the age of 60 and what would be the gains if he survives till the age of 60?
As the duration of the term plan was 25 years, Ajay did not face any difficulty while calculating the gains, which amounted to 26087*25= Rs. 6,52,175
Ajay made a table to calculate the losses that would be incurred if he dies before age 60.
In both cases (Term plan and TROP), Ajay`s family will receive 1 crore as sum assured if he dies before 60. But in the second case (TROP), Ajay will incur some losses if he dies before age 60.
You can use the information from the table above to calculate the amount of loss that Ajay would incur.
This is the first major reason why you should not buy term insurance with maturity benefits. It’s so because if you happen to die before the tenure of the policy, you would have to pay a much higher premium for the same sum assured.
Now, let us consider the second case where Ajay survives till the age of 60.
As explained above, Ajay will receive an amount of Rs. 6,52,175 at the end of his tenure.
To receive this amount, Ajay will have to pay an additional premium of 10,630 on an annual basis. Nevertheless, if Ajay invests the same amount of money in mutual funds for the next 25 years, he will receive an amount of 10.5 Lakhs upon completion of his tenure, expecting returns of 10%. On this account, Ajay will receive 4 Lakhs extra. Besides that, even if we assume the returns to be 8%, Ajay will still receive 7.8 Lakhs.
Now, if we assume returns of 12%, Ajay would receive an amount of 14 Lakhs at the end of his specified tenure.
In both cases mentioned above (Death and Survival), Ajay would be at a great loss if he opts for a term plan with return of premium instead of a pure vanilla term plan.
Keeping all that aside, it’s also important to remember that all insurance companies don’t pay the entire amount of premium after maturity. Some companies deduct the initial premium while others may offer only 75% of the total premium paid.
The only visible advantage in returns of premium plan is that your cover gets reduced once you stop paying premium. For example, if you have taken a sum assured of 1 crore and paid premium only for a time period of 5 years, your cover will reduce to 1/5th of the total amount if the tenure of the policy is 25 years, i.e., your cover would be 20 Lakhs if you stop paying premium after 5 years. Unlike pure term plans, the cover is not completely lost in case of TROP.
Conclusion
Irrespective of popular opinions, Term plan with return of premium or maturity benefit is nothing but an inescapable trap. Therefore, make sure that you don’t fall for it as you are going to lose both ways.
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