Term insurance is the most effective approach to ensure your family’s financial security after your unfortunate demise. Experts believe that every individual with dependents should consider purchasing a term plan before making any other investments. However, the reason so many people in India do not buy term life insurance plan is it doesn’t provide any compensation if you outlast the policy term. You pay premiums for several years and receive nothing at the conclusion of the term can be discouraging for many people. This isn’t the case with the Term insurance with the return of premium plan. TROP is a form of term insurance plan that provides a death benefit to your family if you, unfortunately, pass away during the term, as well as a survival benefit if you live to the end of the term. The survival benefit is the refund of all premiums paid during the policy’s term.
On the surface level, it may appear to be a win-win situation in which you will receive your money back anyway. Is it too good to be true? Let’s find out.
How does a term insurance with a return of premium is different from a regular term insurance policy?
There are two significant differences between a standard term life insurance plan and a term insurance with return of premium plan:
Premiums for a pure term life insurance plan are often relatively low. In fact, one of the best aspects of term insurance is the ability to receive up to 1000X coverage for your annual premiums. On the other hand, premiums for term insurance with a return of premium plan are much higher.
Term insurance with return of premium plan offers both death and maturity benefits, whereas pure term plans only provide a death benefit. This is the reason why TROP plans are more expensive they provide an additional guarantee that all premiums will be refunded to you at the end of the insurance period.
Do we actually get all the premiums back with the Term insurance with the return of the premium plan?
It’s crucial to know that even with term insurance with return of premium, not all of your premiums will be refunded. Only a portion of your premiums are returned back, and even this varies from insurer to insurer. Before signing up for a TROP plan, make sure to carefully review all of the terms and conditions.
In general, below are the parts of the premiums you receive back. ● Base policy premiums paid during the policy period are refunded.
● Additional underwriting fees, or premiums levied based on medical reports, health, habits, etc., are usually returned. Certain exceptions exist.
● Modal loading fees, or the additional premiums charged by the insurer when you opt to pay your premiums in monthly, quarterly, or semi-annual installments rather than annually, are normally repaid.
Similarly, the following parts of the premium are not refunded.
● Taxes on premiums paid are not refunded.
● Rider premiums are not repaid. If you purchased any rider such as accidental, that premiums will not refunded. There are a few exceptions.
Can you surrender a TROP plan during the insurance term and still be reimbursed?
If you wish to cancel the TROP plan in the midst of the policy period, you have two choices.
1. Take the surrender value and discontinue the policy: When you choose to surrender the policy, the insurance company will calculate and pay the surrender value. Every insurance company defines a surrender value factor (SV factor), which is determined by the number of years your policy has been in force. To calculate the surrender value, multiply the SV factor by the entire amount of premiums paid. When surrendering a term insurance with return of premium policy, the policyholder should keep this in mind:
The death benefit will not be paid
Surrender benefit is paid to you immediately.
Note: Please keep in mind that the calculation and criteria used to compute the surrender value vary by insurer and product.
2. Continue the coverage as a reduced paid-up policy with no further premiums: A reduced paid-up insurance allows you to continue the coverage until the end of the term without paying any future premiums. However, the death benefit will be decreased in proportion to the premiums you have previously paid.
If you continue with the reduced paid-up policy, the reduced benefit will be given to your nominee if you unfortunately die within the policy term. If you survive, the insurance company will refund all of your premiums paid before the policy was changed to a reduced paid-up policy. When you switch to a reduced-paid-up policy:
The death benefit will be proportionate to the premiums you have paid. All premiums paid will be returned as a maturity benefit
Why are TROP plans not a good option?
A TROP plan may appear to be an attractive investment opportunity, but it is not. Here are two reasons why.
Expensive premiums: Term insurance is the most inexpensive sort of life insurance accessible today. However, unlike a standard term life insurance plan, the premiums for a TROP plan are extremely costly. The premiums are twice or three times that of a standard term plan, making them unaffordable for many.
No returns on premiums paid: The insurance provider returns the exact amounts of premiums you paid at the policy’s maturity date, and that amount earns no interest. Furthermore, the premium amount is not adjusted for inflation. When you calculate the NPV (Net Present Value) of the premiums, you will be surprised.
What can be done at last:
Experts seem to agree this that one should purchase an adequate term life insurance plan that can cover one family in one absence and invest the rest of the amount that one would be spending on the term plan with return of option in any other financial instrument that will give you better returns.