What is a Term Insurance Plan?
Term Plan Life Insurance is a plan in which a person takes a life cover and pays a premium for the period of cover. The premium is usually paid annually, however other options as half-yearly and quarterly premium are also available. In case the person dies during the plan period, the beneficiary named in the policy will get the assured sum, and in case the person lives up to the period of maturity, he gets nothing.
Actual Returns on a Term Insurance Plan
Term life insurance plan is something like a general insurance plan in which one insures his vehicle or other assets or takes a medical cover, in which he pays an annual premium. In case something happens to the asset or self during the year he may get compensated under the insurance policy, and in case nothing happens he gets nothing and pays the premium for the next year to continue with the insurance cover.
Alternative Offer: Return of Premium in Term Insurance Plan
As there is no return, Term life insurance plans are not popular. Insurance companies, have therefore, come up with another Term insurance Plan Product known as ‘Return of Premium in Term Plan’ where they are returning the entire premium paid during the period of the plan at the end of the term period. However, the premium is much higher compared to a pure term insurance plan.
But Return of Premium in Term Insurance Plan are NOT Profitable
Despite their offer of returning the premium at the end of the plan period in Return of Premium Term Plans, it is NOT at all advisable to buy this product. Let us take an example to understand why it is so. If a person aged 30 years takes a Return On Premium for 25 years, he will pay Rs9, 000 as premium per year and at then at the end of the plan the insurance company will return the total premium paid of Rs 226, 000. If it is a pure term insurance plan the premium will be Rs2, 800 per annum and at the end of the period he will get nothing.
| Age (Yrs) | Term (Yrs) | Sum assured (Rs) | Premium (Rs) | Maturity value (Rs) | |
| ROP Plan | 30 | 25 | 10,00,000 | 9,000 | 226,000 |
| Pure Term Plan | 30 | 25 | 10,00,000 | 2,800 | NIL |
| Premium difference | 6,200 | ||||
Investing Else Where will Give you Higher Return
Though, the sum of Rs226, 000 looks attractive, let us examine closely. Let us say the person only takes a pure term plan and not a Return On Premium, in that case he saves Rs 6, 200 per annum and if he invests that money elsewhere he gets a much better return. See the table below.
| Amount invested per annum (Rs) |
Tenure (Yrs) | Assumed rate of return (%) |
Maturity value (Rs) |
| 6,200 | 25 | 7 | 422,000 |
| 6,200 | 25 | 8 | 492,000 |
| 6,200 | 25 | 10 | 612,000 |
Double Benefits:
The person who opts for the above benefits both ways. In case he dies, the beneficiary will get the insured sum of Rs10,00,000 and the proportionate returns from the investment in which Rs.6200 was invested regularly.
If he survives the term, he will get the above return based on his investment at 7% (Rs 4,22, 000) or 8% (Rs 4,92,000) or 10% (Rs 6,12,000).
So What is the Conclusion
What conclusions one may derive out of this article is that taking a ‘Return of Premium Term Plan’ is NOT at all advisable and to be strictly avoided. Invest in Pure Term Insurance Plans. Taking pure term insurance policies online is much cheaper than taking the term insurance plans offline or through agents.
(The author is Ramalingam.K an MBA (Finance) and certified financial planner. He is the Director & Chief Financial Planner of holistic investment planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He Can be reached at ramalingam@holisticinvestment.in)
Author Bio
I purchased a term insurance policy about 5 years ago and paid regularly premium.Now I am an NRI can I continue the policy