Term Insurance with money back : Pros & Cons

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Deven was planning to get a term insurance for the financial security of his family. Being the sole breadwinner, he wanted his family to be financially secure even if he passed away. But Deven often used to wonder what would happen to the premiums paid out of his hard-earned money, if he outlived the term of the insurance policy. To get clarity on the matter, he went to meet his brother-in-law, a financial consultant. Deven’s brother-in-law told him that he could get a term life insurance with return of premium plan (TROP plan). So, if he outlived the term of the plan, he could get back the amount he had paid as premiums. Deven is now happy with his term insurance with money back plan.  

What is a term insurance plan?

A Term Insurance is a specifically designed life insurance policy that protects an individual’s family and provides them financial security in case of any eventualities. Like most insurance plans, an individual pays a premium for a given term. If the individual passes away during that term because of an accident or due to health reasons, the nominee is assured a death benefit equal to the value of the plan. The premiums are calculated on the basis of the health conditions, the life expectancy and the age of the individual. Insurers often ask the individual to conduct a medical check-up prior to finalising the policy.

Apart from providing a financial security cover to an individual’s family, the term insurance plan also offers tax-saving benefits under Section 80C of the Income Tax Act. Premiums up to 1.5 Lakhs including for the individual, the spouse, and the kids can fall under this category subject to other investments made by the individual. Death benefit pay-outs to the nominee are exempt from tax under Section 10D.

What is term insurance with money back?

This is a form of term life insurance providing a return of the paid premiums till maturity if the policyholder survives the policy term. This is also called term return of premium (TROP) plan. For example, if an individual has secured a policy with Rs 20 lakh cover for 10 years, for which the yearly premium is Rs 5,000. If the individual dies, then the family will be paid an amount of Rs 20 lakh. But if the individual survives the term of the policy, his premium paid for the 10 years will be returned. As a part of the TROP plan, some companies also provide the policyholder with the assistance of a personal advisor to guide the individual throughout the period of the policy.

Benefits of TROP plans:

  1. Assured return of premium: Under a term insurance with money back plan, one is entitled to receive the paid premium amount. An individual can receive up to 100% or 115% of the premiums paid; according to the terms of the specific plan. One must, however, mote that the paid amount is excluding any taxes, rider premiums, modal loading or other underwriting premiums the individual might have paid. This is the foremost benefit of any TROP plan.
  2. Flexibility in choosing a plan: In case of return of premium plan, one has the flexibility of selecting the term plan that makes the most sense for the individual’s particular situation. This is a major benefit of a TROP plan.
  3. Flexible premium payment options: A term insurance with money back also comes with various options for premium payment, allowing policyholders to choose a payment plan which suits them the best. An individual can opt to pay for premiums on a monthly, quarterly or even annual basis. Many TROP plans come with a ‘paid-up’ option. This means that if the policyholder defaults on premium payments, or completely stops paying premium, the policy still continues with reduced benefits.
  4. Other benefits: A major benefit of a TROP plan is that the premium money returned is completely tax-free, as it is not associated with income and is simply a refund of premiums instead. It acts like an automated savings plan which forces you to add to your savings every month. Some TROP plans also end up building cash value which you can take loans against. The loans have to be repaid or else the refund benefit is bound to be reduced by the borrowed amount.

Disadvantages of term insurance with money back:

  1. Expensive: A TROP plan is more expensive than the normal term policies. The premium which is returned is without any interest amount. These comprise the two major drawbacks of a term insurance with money back plan.

Conclusion: A term insurance plan is an asset for every household. It helps protect against many unfortunate events by ensuring financial security even after the loss of the family’s breadwinner. The policyholder, however, should choose the best plan according to his unique requirements. A TROP plan provides several benefits, but is more expensive than normal term plans.

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