When it comes to securing the financial future of your family, life insurance plays a crucial role. One such popular option is a term insurance plan. But did you know there’s a variant known as term insurance with return of premium (TROP)? This plan guarantees to refund the premiums you’ve paid throughout the years if you live out the insurance term. Sounds appealing, right? However, many individuals worry if the greater payment compared to ordinary term insurance policies is justified by this added provision.
In this guide, we’ll break down the advantages and disadvantages, so you can decide whether TROP is a good fit for your financial goals. Let’s dive into the specifics of this plan.
Comprehensive guide on whether term insurance with return of premium is worth it
Basic understanding of term insurance
A term insurance plan is a pure protection policy that provides financial coverage to the policyholder’s family in case of their demise during the policy term. An insurance policy pays a lump sum (sum assured) to the nominee or family if the policyholder dies. But, if the term of the policy is over and the policyholder lives, there is no maturity benefit — you don’t get any money back. The reason is, that it is meant only for life coverage and is pretty affordable.
Term insurance is popular because it is affordable and ensures the financial stability of your family in case of any untimely death, especially given the rise in living costs with current liabilities like home loans or child education.
What is TROP?
Term insurance with return of premium (TROP) is the kind of term insurance plan that includes a savings component. It’s the primary attraction here: if you survive the policy term, you get the premiums you’ve paid over the years returned to you, giving the impression of a win-win. If nothing happens you get your money back and you’re still covered in the event of death.
In India alone, this feature is particularly appealing, as many people want to have a tangible financial return on the policies they invest in, regardless of whether it’s for protection or growth.
Higher premiums
The biggest difference between TROP and regular term insurance plans is the premium. The premiums for TROP can be significantly higher, up to double or more than a regular term insurance plan. That’s because the insurance company has to factor in the eventual refund of premiums. However, this higher cost may not always make good business sense because the return of premium features impacts both the coverage and affordability of the policy, particularly for those who seek cost-effective protection.
Refund of premiums at maturity
The main attraction of TROP is the refund of premiums at maturity. You will get all the premiums you have paid over the years if you survive the entire policy term. This feature makes sure that policyholders do not feel that their money has ‘gone to waste’ if they outlive the policy term, a subject of concern with regular term policies. It is like a forced savings scheme where the money comes back to you at the end of the policy tenure.
No interest on returned premiums
TROP only provides the return of the premiums paid but remember this refund is the total of all premiums not compounded with interest or other return. For example, if you’ve paid ₹10,000 per year for 20 years, then you’ll receive ₹2,00,000 at the end of your policy. The money would not have grown during the policy term, but the money would have grown. Thus, in real terms, the amount to be refunded would be in actual terms less.
Lack of flexibility in investment
The biggest downside of TROP is the limited flexibility around how your money works for you. TROP is unlike market-linked plans like Unit-Linked Insurance Plans (ULIP) wherein the premiums are invested in different financial instruments like equities and bonds to potentially generate higher returns. When you have this premium, you pay a premium that is locked up and returns, without growth or accumulation, so this isn’t as interesting for someone who wants both protection and creating wealth.
Lower death benefit in case of TROP
Since TROP requires higher premiums for the same level of life cover, it often results in lower death benefits relative to a standard term plan. For example, a ₹10,000 yearly premium for ₹1 crore insurance in a standard term plan may only result in a ₹50 lakh cover under TROP because of the premium return feature. If you prefer larger life insurance coverage for your family in the event of death, this may be a drawback.
Opportunity cost of higher premiums
If you choose TROP, you will be paying a bit of extra premium, which can be invested somewhere else for better returns. For example, you might pay an additional ₹5,000 or ₹10,000 per annum for TROP and invest this money in mutual funds, fixed deposits, or other financial instruments which may not only receive your money back in the form of a refund of premiums but also offer returns over the refund of premiums. That is why you need to consider this opportunity cost, particularly if you are aiming to create wealth in addition to life insurance.
Tax benefits
Both TROP and regular-term insurance plans offer tax benefits under the Indian Income Tax Act. Under Section 80C, premiums paid towards the policy can be claimed as deductions (up to ₹1.5 lakh). Furthermore, under Section 10(10D), the return of premiums in TROP is tax-free, if Government conditions are met, on maturity benefits. Therefore, TROP still offers tax-saving advantages similar to that of any other life insurance plan and therefore can be a good tax-conscious investment option.
Suitability for conservative investors
TROP suits conservative investors who are risk averse. If you do not want the volatility of market-linked investments and prefer a guaranteed amount back, TROP can provide you peace of mind. It’s an appeal to people who want insurance but don’t want to pay if they live beyond the policy term.
Is TROP worth it?
The value of term insurance with premium return is heavily influenced by your financial priorities and risk tolerance. If you want a low-cost plan that provides maximum coverage for your family in the event of your untimely death, standard-term insurance is the best alternative. The premium difference might be invested elsewhere to get larger profits. However, if you’re a conservative investor who values assured benefits, TROP may be intriguing, even though the opportunity cost is higher owing to the absence of returns on returned premiums.
Finally, TROP is not always preferable to traditional term insurance plans.
It all boils down to what you’re comfortable with taking risks for bigger returns or receiving certain, but smaller, financial rewards.
Also Read: HDFC Life Announces a Tri-party Tie-Up with Metropolis and CallHealth
Thank You For Your Vote!
Sorry You have Already Voted!
