It is that time of the year when you may be searching for tax-saving products, including life insurance policies. But if you want returns from this ‘investment’ too, you might have come across return of premium term insurance plans. However, before you decide to invest here, take a look at what insurance experts, including those from insurance companies, and financial planners, have to say about this product.
Chief and appointed actuary, Bharti AXA Life Insurance Co. Ltd
There are two types of customers who buy protection or term plans. They are mainly those who only need life cover, and others who, in addition to life cover, want their money or premiums paid back if nothing unfortunate happens to them. The requirement for the former type of customer is met by pure term insurance plans, while the requirements of the other customers are met by return of premium term insurance plans. As the return of premium term insurance plans involve giving back the premiums paid at maturity, they are more expensive than the regular pure term plans. Typically, a pure term plan offers a longer coverage term. For customers who want a longer period cover, a pure term plan might be a more suitable option. The ultimate objective of buying a term insurance plan is protection against life. This is served or achieved by both the regular pure term plans and the return of premium term plans. However, as the return of premium term insurance plans do not include any savings element, it would be preferable to buy a pure term plan to meet the life cover needs. But some customers want their money back and prefer this plan and it is the customer’s choice.
Director- health, life & strategic initiatives, Coverfox.com
This plan, as the name suggests, is a term life insurance plan that promises to return your premium in case you survive the term or duration of the cover. The premium being twice to thrice the premium of a regular term plan, it is not suitable for every segment or demography. Return of premium term insurance plans are sold by agents and intermediaries to customers who demand the regular term insurance plan with the sales pitch that they can get the added advantage of getting their invested premium back if they survive. Such plans, unfortunately, work well with a large segment of Indians who are still fixated with ‘money-back’ type of insurance plans. In reality, anyone who can do basic math will be able to calculate that the significant additional premium paid, just to get the psychological “return" advantage, can be invested in equally safe avenues to enjoy better returns. Unlike the regular term plans, the return of premium plans have a definite return of either the premium amount or the sum insured during the cover term, this makes such plans 2-3 times more expensive than the regular plans. Term insurance offers the most cost-efficient financial security.
Founder, Max Secure Financial Planners
In case of a return of premium term insurance, the premium paid by the insured is returned to the survivor(s) in case of demise of the policy holder along with the sum assured; otherwise it is paid back to the policyholder after the expiry of the policy. Ideally it should not be bought at all. But it is marketed with a logic that the plan cost nothing since one gets back the premiums where as in case of a regular term plan one gets back nothing. In fact one gets much less than what one pays for it if you factor the time value of money. In the worst case scenario, one can buy it for capital protection of the premium paid. The premium on these plans is 3-10 times than the corresponding term plans. The plan is priced higher due to the return of capital. Generally the premiums are returned without any additional interest/return but some Insurer(s) pay marginally higher. Even factoring the marginal higher value, one gets the discounted value if one factors the time value of money and inflation. It should not be preferred over the regular plan. Before buying these products, one should consult a professional financial adviser who provides unbiased advice.
Managing director and chief executive officer, Aegon Life Insurance Co. Ltd
This plan meets the requirement of a term plan by paying a lump sum amount on death. In addition, it returns all the premiums paid if one survives the entire policy term. Some people think their money will go waste if they buy a term insurance plan and survive the policy term. While this thought is incorrect, the return of premium plan addresses the needs of such people. In any life insurance plan, the insurer charges a premium, which reflects the expected value of death claims, cost of administering the plan and some profit margin. In a return of premium term insurance plan, the insurer has to return all the premiums to those who survive till the end of policy term. The insurer has to add this component to the premium, which makes the premium on these plans expensive by approximately 2.5 times. Should it be preferred over a regular term plan? The answer depends on your need. If you are expecting life insurance to financially protect your family from death, and you can manage your saving needs through other means, term insurance is the best. If you want to receive a payout on survival of the policy term, you should buy return of premium plan.