When it comes to understanding Indians’ mindsets in regard to the choice of life insurance they opt for, one has to understand life insurers are astute and knowledgeable. While the majority of Indians continue to choose traditional endowment-type life insurance, a rising segment of the public realizes why plain-term life insurance, the age-old is the best alternative. And, there is another section of people- cost-conscious who are still unable to accept the idea that term plans do not pay anything back upon maturity (or survival) and to cater to these individuals, life insurers wisely introduced the ‘Return-Of-Premium’ option for term plans in which the term insurance plan provides some survival benefits. In this article, we will see whether buying term insurance with a return of premium makes sense.

How does the Return of Premium plan differ from the simple term plan?

In the event of the policyholder’s unfortunate death within the policy period, both the simple term plan and the term insurance with return of premium term plan pay the same sum assured which the policyholder bought at the time of purchase. However, the distinction comes in terms of survivability. A simple term plan pays zero on maturity or survival. However, the return-of-premium plan will refund any premiums paid over the years. This sounds appealing. Isn’t it? It does, however, there is a hidden piece of information that many of us skip. The premium for the Return-of-Premium (ROP) plan is higher than that of the simple term plan. And this is precisely what makes these ROP choices unsuitable for people who are looking for affordable life insurance plan.

Understanding Return of Premium Waiver With an Example

Assume a 35-year-old female/ male wants to buy a term life insurance policy for ₹1 crore for 30 years. Here is the cost difference between term insurance with return of premium and Term Life Insurance:

Plain Term Plan: ₹18,934 annual premium for 30 years.

Return-of-Premium Term Plan: ₹47,712 annual premium for 30 years.

The difference in premium for both is ₹28,778 – equivalent to nearly one and a half year’s premium for the simple term plan. Remember that both plans provide the same ₹1 crore payout in case of an emergency.

The only difference is that in the event the policyholder outlives the policy, the simple term plan will pay nothing. The return-of-premium version refunds all premiums paid over 30 years (i.e., 30 x ₹47,712 = ₹14.3 lakh).

Does it make sense to opt for the Return of Premium option?

The term insurance with return of premium plans provides no returns or interest. If you still believe that the return-of-premium plan provides some benefit at maturity (despite the higher premiums), here is the real difference. The difference in premiums between the two policies is ₹28,778 (calculated as ₹47,712 – ₹18,934). What if instead of choosing the return-of-premium option, the customer chooses the simple term plan (with ₹18,934 yearly premium) and invests the difference of ₹28,778 per year for 30 years? With the help of a calculator, one will be able to predict how much this investment would be worth if made on a regular basis over 30 years. The investment value can range from ₹29 lakh to ₹52 lakh, assuming a return of 7% to 10%.

Compared to the other choice, the term insurance with return of premium option simply returns the ₹14.3 lakh premium earned over time, without any capital appreciation. You can now understand why choosing the return-of-premium option is pointless.

So, it’s recommended by the experts to buy a simple term insurance and then invest the difference (in premium over the return-of-premium plan’s premium) in PPF, stock funds, and other investments. You will easily receive a far bigger amount at maturity than what insurers return to you under Return-of-Premium plans.

The term insurance with return of premium is entirely based on maths. However, if you ask insurers or their representatives which choice to choose, they will undoubtedly push you towards the return of premium plans, using marketing tricks such as how it is like having ‘free insurance’ because it returns all premiums paid over the years. But they will never tell you about the second scenario, in which if you invest the premium differential amount elsewhere, there is absolutely no reason to choose these products.

Does it make sense to add Return of Premium Riders in Term Insurance Plans?

Financial returns will be guaranteed: While many forms of life insurance products, such as ULIPs and Endowment plans, provide a guaranteed return, term insurance plans do not. A Return of Premium rider in term insurance plans provides guaranteed returns if the policyholder lives out the plan’s tenure. If the policyholder dies while the plan is in effect, the beneficiaries will get the death benefit.

Tax benefits: The premiums paid for the Return of Premium rider in term insurance are eligible for the tax benefits provided by Section 10(10D).

Just like pros, there are certain cons to keep in mind:

High premiums: Because term insurance with return of premium guarantees a payout, insurers bear a financial risk. To distribute the risk, term insurance companies require you to pay a significantly higher premium. This contradicts the fundamental advantage of term insurance plans: affordability.

Multiple conditions: Because the Return of Premium riders in term insurance policies provide a guaranteed return, term insurers impose a set of terms and conditions. Only after these conditions have been met by the policyholder can the Return of Premium benefit be accessed and utilised. 

So we are saying,

When you choose a term insurance rider or plan, you must carefully examine the benefits and cons and compare premiums to determine whether the purchase is worthwhile for the benefit it provides. Unfortunately, the advantages of Return of Premium Riders in term insurance contracts do not exceed the disadvantages. As a result, the rider is rarely suggested if you want an economical and profitable term insurance policy.