Regular Term Plan vs Term Insurance with Return of Premium

Written by : Knowledge Centre Team

2021-07-11

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Having a term insurance plan is not an option - it is a must to secure the future of your loved ones. You can choose a term plan or return of premium with a term plan, depending on your needs. A term insurance plan with return of premium promises to return all the premiums you have paid till the policy matures if you survive the term without a claim. That makes a term plan with a return of premium almost a free of cost safety net for the family.

However, with iSelect Smart360 Term Plan, you can choose to get all your premiums back with Special Exit Value. This benefit is available where the policyholder will be returned all the premiums paid, excluding the underwriting extra premiums and premiums paid for the optional in-built covers.

Term Insurance Plan vs Term Insurance Plan with Return of Premium

You can opt for either of the two plans. The underlying reason to buy a protection plan is the same - to secure the future of loved ones under all circumstances. However, both the plans are different in a few aspects:

1. Survival and Maturity Benefit

Standard term insurance plan does not offer survival benefits if you survive the policy tenure. It means you do not receive any amount from the insurance company at the end of the policy tenure.

When you buy a term plan with a return of premium option and survive the policy tenure, you receive the total paid premium as a survival benefit.

2. Premium Cost and Payments

The premium for the term plan with the return of premium option is higher than the standard term life cover. The following differences may apply to the premium payment options:

The standard term plan offers – single, limited pay and regular pay options
Term plan with return of premium option – Only limited pay and regular pay options

3. Policy Term

You can have a standard term life cover for up to 99 years of age. However, with the return of premium option, the policy term could be limited to 70 years.

4. Option to Increase Sum Assured

With a standard term insurance cover, you can increase the base sum assured at specific life stages. If you want to increase the coverage, you can submit proof of the life event and ask for an increase in the sum assured.

Usually, a term plan with a return of premium option does not allow an increase in the sum assured within the policy term. However, the iSelect Smart360 Term Plan from Canara HSBC Life Insurance allows for the same.

You can block your premium at the commencement of the policy if you feel you will need to exercise the option. This will allow you to increase your sum assured within the next five years without full underwriting.

You can increase the sum assured in the iSelect Smart360 Term Plan for marriage, childbirth and home loan.

5. Additional Covers

Both standard term plans and return of premium term plans offer you additional riders to improve your coverage. Additional covers can include critical illness, accidental total and permanent disability, accidental death and child care benefits.

The return of premium option applies to the premiums you pay for the addon riders as well. So, if you opt for these riders and survive the policy term without a claim you will receive all the premiums including the additional premium for the rider.

The only premium charged for added risk (a health condition or occupational hazard) will be held back by the insurer.

6. Tax Benefits

Tax benefits are the same under both term plan and return of premium term plan. The amount you pay towards a term insurance policy (or TROP) is eligible for a tax deduction. However, with TROP you save more tax per transaction as the premium amount is on the higher side.

Learn how to save tax with a term insurance plan.

7. Payment of Death Benefit

You can select between different options for death benefit payment under both term plan and return of premium term plan. Usually, the following options are available to you:

Lump-sum Payment: 100% death benefit paid in a single transaction
Regular Income Payment: 100% death benefit converted to a regular monthly income payable for a specific number of years
Regular Income + Lump Sum: A part of the death benefit payment will be in a lump sum, while the other will be converted to a regular income

Under the iSelect Smart360 Term Plan you can choose to have death benefit paid as a growing income as well.

Assume you buy a term insurance with the return of premium option. Since you want to get a cover of Rs 1 crore, you have to pay a premium of Rs 7,500 every year. Your policy tenure and premium payment tenure are 10 years, which means you have to pay Rs 7500 every year for the next ten years to keep your policy active. Two cases can arise after you buy the plan:

Untimely Demise:- In case of your untimely demise, the insurance company will pay your nominee a sum assured of Rs 1 crore.
You survive the Policy Tenure:- If you survive the policy tenure, you will receive all the premiums you paid during 10 years. Hence, you will receive Rs 75,000 at the end of 10 years.

In either case, you get something back if you buy a term insurance plan.

If you opt for the return of premium option, make sure to have an adequate policy term, riders and sum assured. Also, the cash benefit from the return of premium term plan can help at the time of retirement.

Although the return of premium option has a higher premium cost, it is a worthwhile plan to consider for your family’s financial safety.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.