Best Term Plan with Return of Premium: Is It Worth It?
We do not like to think about life insurance. Most people buy it because they want their loved ones to be financially secure in case anything unforeseen happens to them. Among all forms of life insurance, term insurance is believed to be the simplest and also the most reliable.
However, there is one major issue common to everyone. People are not comfortable paying premiums and not getting anything in return if they live beyond the policy period. Because of this emotional issue, there has been a great demand for a special policy known as the best term policy with return of premium.
Sounds like a deal, right? We are protected in case something happens, and we are covered in case nothing happens, and we get our money back. But does it make practical rather than just emotional sense? First of all, let’s understand the matter under discussion in detail.
What Is Term Insurance, and Why Is It Important?
Term insurance is considered a pure protection insurance plan. It is important to note that the major aim of term insurance is to give your family the necessary financial support in case you are not around. As previously noted, it is important to pay the premium at the end of every year for an agreed number of years, referred to as the term of the plan.
If the insured lives beyond the term insured for, there is no maturity benefit. That is the reason one thinks term insurances are a “loss.” This thought process is incorrect. Term insurances are not invested in to gain more. It is taken to ensure the lovers of the insured do not suffer.
Why Do People Hesitate to Buy Term Insurance?
The biggest emotional challenge is quite simple: people do not want the feeling of paying premiums for a long time and receiving nothing. Just because something is important does not mean people want to feel that they are getting nothing for that importance.
“Many people say things like:
- “What if I live till the end of the policy?”
- “All that money will be wasted.”
- “At least I should get something back.”
This attitude is very common, and insurance companies know this very well. This is the reason the return of premium insurance plans was introduced.
What is Term Plan with Return of Premium?
A term plan with return of premium functions in a similar fashion to a regular term plan. The difference appears at the end of the policy term. If the policyholder survives the entire policy term, the company refunds the total base premium paid. When the insured dies during the policy term, the nominee gets the full amount assured, as in the case of any term plan.
It has to be noted, however, that the refund does not generally include taxes, rider fees, and extra expenses, but only the basic premium amounts. Because of this feature, some people think that they are getting protection and saving in one.
Why Return of Premium Plans Look Attractive
Return of premium plans are also created in a manner that works well with human emotions. It is safe, and many people will find it comforting because they will essentially get their money back.
Another reason why these plans look so attractive is that they offer regret removal. People feel happy because they think that even if nothing goes wrong, the plan still covers them at the end.
The Real Cost: Higher Premiums
This is where the reality starts to show. The premium that is required for a return-of-premium policy will be much higher compared to the premium that is required for a regular term insurance policy.
It may actually be two or three times more costly. You are not getting any extra protection. You are paying in excess for only the maturity benefit. Over a long period, there may be a huge difference.
A Simple Example to Understand the Difference
Let’s take a look at a basic example to illustrate this. For example, if an investor buys a regular term insurance policy with a premium of 10,000/- per annum, he has to pay this premium for 30 years. This will amount to 300,000/- in total. The coverage will be 1 crore. In case of survival, there will be no maturity.
Comparing this with the term plan with return of premium, in this plan, the premium may also be around ₹25,000 for the same sum assured and policy term. After paying premiums for 30 years, the total premiums will be ₹7,50,000. The policy will then pay out ₹7,50,000. Though getting the full premium amount back may be satisfying for the policyholder, he would have paid a lot more during his lifespan.
The Impact of Inflation
The often-overlooked aspect in the case of the return of premium plans is related to inflation. The money loses its value with time. An amount of money that may seem substantial today may just not be enough in the times to come.
₹7.5 lakh after 30 years will have much lower purchasing power than it does today. There is no growth, no interest, and no protection against rising costs. So, in essence, you get your money back, but its actual value is significantly less.
Is Best Term Plan with Return of Premium an Investment?
The clear answer is no. Not even the best term plan with return of premium should be expected to behave like an investment or savings product. It pays no return. It does not beat inflation. It does not grow wealth.
It is still an insurance product. The return of the premium feature only eliminates the “lost feeling” but does not create financial gain.
Who Should Consider a Return of Premium Plan?
Such a plan may be convenient for people who are highly emotionally invested in making financial decisions. If an individual dislikes the notion of getting nothing back, such a plan may work for them.
It would also be useful for people who are not making investments elsewhere and want the guarantee, even if the financial return is poor. To such people, the comfort of the emotions may be worth the cost.
Who Should Avoid It?
Persons who understand the dimensions of money, inflation, and investing tend to stay away from return of premium plans. If you want maximum life cover with minimum premium outgo, regular term insurance is a better bet.
If you are already investing in mutual funds or fixed deposits, etc., the distinction between insurance and investment makes more sense.
Final Verdict: Is It Worth It?
The best term plan with return of premium is a product that, while not a bad product, is not exactly the smartest financial decision.
Consider this only if emotional support is more important to you than financial efficiency. However, if you are looking for protection and financial efficiency, then regular term insurance would be a better choice.
Conclusion
The main role of insurance is protection, not wealth creation. After you have secured your family’s future, you can then proceed to secure wealth creation via appropriate wealth investments. Make your choice on how you think about money. Choose clarity over confusion and logic over fear.
