If you’re looking for the best term plan, your motto is easy: cover your family at an affordable price. A term insurance plan with return of premium (TROP) is enticing since it returns your money if you outlive the term of the policy. That sounds great, doesn’t it? Pay more here, get it all back there.
Let’s see. The ideal term plan generally provides high coverage at minimal cost. A return of premium term insurance plan does the same, but with an added feature: you receive a refund if you survive the full term of the plan. But is it worth paying the additional amount?
In this article, we break both of them down in plain English. You’ll know how they work, what they provide, and if a return-of-premium plan is actually better for you or not.
We vow to make it friendly and very easy to understand. Whether you are 18 or 80, this guide will make you feel confident in your decision.
What Is Term Insurance?
A term insurance plan is a safety net. You pay a low premium amount each month or a year. If something goes wrong with you during the time you have the plan (such as 20 or 30 years), your family gets a big sum of money. This money can help them pay for everyday expenses, loans, or school for their children.
But if you survive the entire term, the policy expires, and nothing is returned. It’s an easy method of keeping your loved ones safe, but no repayment is given for the money you have paid.
How Does Return of Premium Work?
This is where an insurance plan with return of premium deviates. You get the same cover during the policy period. But if you are alive at the end of the plan, the insurance company returns all the premiums you have paid. It’s a no-loss situation.
But at a greater cost. The premium is much more than a normal term plan. At times, you might even double it. So, while your money gets returned, you’re also paying extra initially.
Pros of a Return of Premium Plan
- Feels Like a Refund: You don’t lose your money. It’s like saving with insurance.
- Financial Discipline: It keeps you on track with your payments.
- Peace of Mind: You won’t regret the plan if you survive it.
Cons to Remember
- Higher Premiums: You pay more for the same amount of coverage.
- Lower Returns After Some Time: Inflation reduces the money returned to you.
- No Additional Benefits: As opposed to investment plans, there is no interest or increase in the money that is returned.
- Locked-in Money: You cannot use or invest the additional money you’re paying yearly.
How Are the Two Plans Different?
Suppose you are deciding between a typical term plan and a term insurance plan with return of premium. With the typical plan, your premiums are significantly less. You have good coverage, but no payback if you outlive the term. It’s paying for peace of mind.
With the comeback of the premium plan, you pay much more, sometimes twice. But if you remain healthy and survive the policy period, you receive your entire money back. Nevertheless, its worth will be less as the inflation will eat into it. And while the thought of a refund sounds good, forget that the excess amount you paid could have been invested elsewhere for better growth.
In summary, a standard term plan provides affordable protection with flexibility to invest the remaining. A return of premium plan provides you with protection along with a refund, but at a higher expense and lower flexibility.
Who May Want to Look at Return of Premium Plans?
- Young families or conservative planners who desire both protection and a refund.
- Individuals who are not confident in investments or do not wish to handle their money actively.
- Anyone who dislikes parting with money and wishes to receive something in return at the end of it.
Who May Avoid It?
- Astute savers and investors who would prefer lower premiums and higher returns in the form of mutual funds or other savings instruments.
- Individuals on a tight purse string who must keep premiums as low as feasible.
- Individuals who are worried about inflation, as the refund might not be of the same value after 20 or 30 years.
Key Points to Consider Before Selecting
- Your Budget: Would you be able to pay the increased premium every year without stress?
- Your Financial Goals: Do you have alternative saving or investing plans in place?
- Your Risk Comfort: Would you be comfortable receiving nothing back if you opt for a regular term plan?
- Inflation Effect: Would the money returned be sufficient to make a difference in 20–30 years?
- Better Use of Money: Would you make more by investing the difference in premiums yourself?
Let’s Look at an Example
Assuming you are 30 years old and purchase a 20-year ₹1 crore policy:
- A standard term plan is ₹5,000 annually. So for 20 years, you pay ₹1,00,000.
- A return of premium plan is ₹10,000 annually. So for 20 years, you pay ₹2,00,000. Then you receive ₹2,00,000 in return if you survive.
Sounds great, huh? But don’t forget that ₹2,00,000 will not be as valuable in 20 years. If inflation is only 5% per year on average, that ₹2,00,000 may be able to buy the same as you can with ₹75,000 today. And if you had opted for the standard plan and invested the ₹5,000 you saved annually, it could be a lot bigger.
So, Is It Worth the Extra Cost?
It depends on what you are like.
If you prefer straight protection at the cheapest, the ideal term plan for you may be the standard one. You save today, secure your loved ones, and enjoy greater savings flexibility.
If you like knowing you’ll receive back your money, and you don’t object to paying extra for this benefit, then a term insurance policy with return of premium may make you sleep well.
Just keep in mind: having your premium reimbursed doesn’t equate to making a profit. It just means you didn’t “lose” it. Due to inflation, that reimbursement might not be very useful.
Final Thoughts: Make a Choice That Feels Right
There is no one-size-fits-all solution. Your dream plan varies based on your stage of life, your budget, your saving patterns, and your level of risk tolerance.
Here’s a straightforward way to think about it:
- Want the cheapest protection? Opt for a standard term plan.
- Want insurance, a refund, and peace of mind? A return-of-premium policy might be more suitable for you.
- Want both? You can take a low-cost term plan and invest the balance yourself.
Whatever you do, you’re taking the right step by considering your future. And that’s more important than any policy.