Once you start working, your first priority may be to buy life insurance to protect your family’s financial future should you meet with a fatal accident or pass away unexpectedly. While insurance is undeniably important, it’s equally necessary to pick the right type of policy.
There are scores of policies available and you want to strike a balance between affordable premiums, good coverage, and add-on benefits. In such a situation, you may find yourself staring down at term plans and return of premium plans, also known as premium-back policy. While the latter seems more enticing from the get-go, there's more than meets the eye! Here's all you need to know.
Term plan vs. Return of premium plan
A term plan is the most straightforward life insurance policy. Here you pay premiums in exchange for a death benefit that is payable to your nominee. However, there is no survival benefit. This means if you outlive the policy, you don’t gain in any manner. On the other hand, a return of premium (ROP) plan offers a survival benefit, which means the insurer will return to you the premiums that you have paid. So, assume that you pay Rs 7,000 as premium each year for 15 years. If you outlive the policy, you’ll get Rs 1.05 lakh back.
Validity, features & affordability
Both policies offer coverage for a period starting from 10 years. However, comparing on the basis of sum assured alone, term plans are more affordable than ROP plans. Apart from the basic sum assured, both provide add-ons such as terminal illness cover, premium waiver, and accidental death benefit. The more the add-ons and benefits, the higher the costs. Some customers prefer ROP plans because their premiums paid come back to them. Whether this return of premium is actually useful is debatable.
Cost benefit analysis
Let’s say you are a 30-year-old looking for a term cover of 30-year tenure of Rs 50 lakh. A typical term plan costs around Rs 5,000 per year. This means paying Rs 1.5 lakh in premiums over 30 years. A typical ROP plan with the same parameters costs upwards of Rs 10,000 or Rs 300,000 over 30 years. If you buy a term plan and invest the difference (Rs 5,000) in a mutual fund returning an average of 12 per cent per annum, you get a corpus of Rs 13.51 lakh in 30 years. But with the ROP plan, you get only Rs 3 lakh back.
Understanding the net benefit
As mentioned earlier, an ROP plan seems more lucrative on paper because of the survival benefit. But before you invest you must calculate that the amount that you are paying extra as premium, and see whether the return of premium is truly beneficial. With the cost benefit analysis, we can see there is a clear winner. You should go with a term plan and invest the surplus in a long-term equity fund.
Where should you buy your insurance policy?
You can buy a policy of your choice directly from an insurance provider or through your bank. The most convenient option, however, is to buy it online. Not only is it more affordable, you also have the option to compare various policies, read reviews and assess all the information at a glance. When it’s time to pick a policy that’s right for you, keep this primer handy. If coverage is all you're looking for, pick a term policy. If it is the returns you want, go for investment options such as mutual fund schemes.
— The writer is CEO, BankBazaar.com
