Money
Zero-cost term insurance policy: Do benefits outweigh the costs?
Summary
- They come with longer tenures, offer a single exit option and there is no cash benefit if the option is exhausted.
Would you be interested in an insurance plan that offers to return all your premiums paid over the years? That’s exactly what a zero-cost term insurance plan does. Insurance companies such as Max Life, HDFC Life, Bajaj Life and ICICI Prudential Life offer ‘zero-cost’ term insurance plans in which policyholders can foreclose the policy if they so wish and get all premiums refunded or continue the plan till maturity without any cashback benefit. But, does it make sense for you to buy zero-cost term insurance?
Typically, a term plan offers protection during the policy tenure but there is no cashback if you outlive the policy. Zero-cost term insurance plans returns the premiums paid but come with strict exit conditions. For example, Max Life zero-cost term plan, Smart Secure Plus, is available only if you opt for 40 policy years or more. It means a 30-year-old will have to buy a term plan that covers him until 70 years of age. For HDFC Life, it is 36 policy years. In case of ICICI Prudential, it is available till the age of 55 years for those in the 18-34 years age bracket and 31 policy years for those who are 35 years old and above.
To be sure, the return of premium in zero-cost term plans is different from ‘term plans with return of premium’ (TROP) which have been around for a long time. This, too, is a type of a term insurance plan in which the insurer returns the premium amount that policyholders have paid over the years if they survive the policy tenure. But the premiums are almost double than in a regular term plan.
“TROP comes at a premium of 2.5 times that of a pure term plan. In the zero-cost term plan though, there will be a one-time special exit option in which we return all premiums paid so far if you buy a long-term policy. If you don’t surrender it during the exit window, the policy will end by the original tenure without any return of premium," says Vaibhav Kumar, head of product management at Max Life Insurance.
Hidden costs?
Financial planners point out the drawbacks of the zero-cost term plan. The tenure is longer than necessary for most individuals. And no money is given if you continue with the policy till maturity after exhausting the exit option.
Despite this, many people have lately been opting for higher policy tenure in term plans. “We did a consumer survey in 2021 which revealed that the average policy tenure in term plans had gone up from 25-30 policy years to 35-40 years in the last 3-4 years. This made us launch an updated term plan with a special exit option so that people who have bought a long-term plan want to discontinue it, they get to foreclose the policy and at the same time receive some benefit out of it. If they don’t foreclose it, the cover will last until the original policy tenure," says Kumar.
So, if a 35- year-old man wants to avail of Max Life’s zero-cost option, he will have to go for a term plan of 40 policy years, that is, coverage till the age of 75. The exit option will be available after 25 policy years, that is, at the age of 60. This policy will come at a premium of ₹25,953 for ₹1 crore coverage and premium payment term of 25 years, data available from insurance advisory platform Ditto says. However, if the policyholder is sure he needs the policy only until the age of 60, he can go for a shorter policy tenure. A term plan of ₹1 crore coverage having 25 policy years will come with a ₹14,440 annual premium. It means essentially you are paying ₹11,153 (25,953-14,440) extra to avail of the ‘special exit’ option at the age of 60. If you avail of it, you’ll get ₹5.25 lakh at the time of exit though you would have paid ₹6.48 lakh so far. This is because the insurance company does not return the GST, or goods and service tax, amount on annual premiums. Interestingly, if you simply buy a term plan for ₹14,440 and invest an additional ₹11,153 in an equity mutual fund, considering a 10% CAGR (compound annual growth rate), you will accumulate ₹12.45 lakh.
“While the difference in premium for younger people will not be big in absolute money terms, those in the age bracket of 35 years and above should avoid zero-cost term plan and rather focus on having a bigger coverage. A bigger cover till 55-60 years of age is more prudent than taking a smaller cover for 75-85 years of age," says Nishant Batra, chief goal planner at Holistic Prime Wealth, a financial planning firm.
Why buy zero-cost plans
The very idea that you get nothing if you live through the policy period dissuades people from buying a term plan in the first place. They instead opt for investment-linked insurance plans in which life cover is minimal. Insurance advisers say it is hard to convince people to buy a pure term policy; the zero-cost option helps in increasing its penetration. They believe it may not be better than a pure term plan, but at least it is much better than TROP, endowment policies or having no cover at all.
Who should consider zero-cost term plans? “People who are not sure at the inception about the policy tenure or the financial dependencies on their income can consider such plans," Manju Dhake, vice president-insurance at 1Finance, a financial advisory firm says. It means people who are yet to get married and have kids can buy a long-duration term plan that gives them a special exit window at an appropriate age.
Mint take: Zero-cost term plan makes for a smart sales pitch. Opt for it only if you actually require a term plan for longer policy years. Note that a longer policy tenure comes with a higher premium for exhaustive insurance coverage. Don’t compromise on the policy coverage extent just to avail of the zero-cost option. Experts advise against going for a low-premium, low-cover term plan having longer policy years.
