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Term Insurance with Return of Premium (TROP)
If you want long-term financial security for your family, a Term Plan is a great choice. It’s affordable and straightforward. You get coverage at a low premium. If the policyholder dies during the term, the beneficiary gets a Death Benefit.
If the policyholder survives, there’s no payout. This lack of survival benefits is a downside, leading some to think, “Term Plan pays only if I die.” However, a Term Plan with a Return of Premium Option (TROP) offers some cash value and is more affordable than a permanent plan.
Table of Contents
Key Insight about Term Plan with Return of Premium
Here’s a table summarising the key aspects of a term plan with a return of premium:
What is Term Plan with Return of Premium?
Term Insurance with Return of Premium is a non-participating insurance plan that provides a guaranteed return of premium option. Under this variant, there are two types of claim benefits:
1. The nominees are paid Sum Assured in case of the policyholder's death during the policy term.
2. In a case where the policyholder survives the term, the entire premium paid towards the policy is reimbursed to the policyholder, provided all the premiums are paid.
How Does Term Plan with Return of Premium Work?
A Term Plan with a Return of Premium (TROP) works similarly to a standard term life insurance policy but with an added benefit. Here’s a breakdown of how it functions:
- Premium Payments: Pay regular premiums for a specified term, ranging from 5 to 30 years.
- Coverage: If you pass away during the policy term, your beneficiaries receive the sum assured, just like in a regular term plan.
- Return of Premium: If you outlive the policy term, the insurer refunds all the premiums you paid over the term tax-free. This is the key feature that differentiates TROP from standard term plans.
- Cost: TROP policies are more expensive than regular term plans because they return premium features.
- Riders: Some insurers offer TROP as a rider that can be added to a regular-term life insurance policy.
Understanding Term Plan with Return of Premium Scenarios with Illustration
To understand how Term Insurance with the Return of Premium works, let us take an example:
Rohan is a 35-year-old software engineer living in Bengaluru. He is married and has a young daughter. Rohan is very conscious about securing his family’s future, so he buys a term plan with a return premium policy.
After researching, Rohan selects a TROP policy with a 20-year term and a sum assured of ₹50 lakhs. So, Rohan diligently pays his premium of ₹25,000 every year. He knows this policy provides life cover and returns the premiums if he survives the term.
Scenario 1: Death During the Policy Term
If Rohan passed away during the policy term, his family would receive the sum assured of ₹50 lakhs, ensuring their financial stability.
Scenario 2: Outliving the Policy Term
If Rohan has successfully paid all his premiums and is in good health, the insurance company will return a total of ₹5 lakhs (₹25,000 x 20 years) as a tax-free lump sum of the premiums he paid over the 20 years since he has outlived the policy term.
Disclaimer: The above illustration is a hypothetical example created for educational purposes only and does not represent a real-life scenario. Please read your policy documents to understand the terms and conditions clearly.
What to Expect When Your Term Plan with Return of Premium Policy Matures?
Base Premiums
The base premiums you paid during the policy term will be returned to you.Modal Loading Premiums
If you opted to pay your premiums monthly, quarterly, or half-yearly instead of annually, you paid additional modal loading premiums. These are usually returned to you upon policy maturity.Additional Underwriting Premiums
You might have paid these extra premiums based on medical reports, health conditions, or lifestyle habits. Generally, these premiums are also returned to you.Rider Premiums
Premiums paid for additional riders (such as critical illness or accidental death benefits) are typically not refunded. However, depending on the specific terms of your policy, there may be exceptions.Taxes
Any taxes associated with your premium payments are not refunded when the policy matures.Non-Refundable Additional Underwriting Premiums
Some TROP products may have specific additional underwriting premiums that are not refundable. It’s important to check the terms of your policy for details.Features and Benefits of Term Plan with Return of Premium
1. Affordable Coverage
A Term Plan with Return of Premium is known for its affordability. Compared to traditional life insurance policies, the premium for TROP is generally higher, but it provides an attractive proposition of a potential premium refund.2. Guaranteed Premium Return
The primary feature of a TROP is the guaranteed return of premium. If the insured survives the policy term, i.e., the policy's maturity, the premiums paid throughout the policy duration are returned. This ensures that the insured receives back the total amount of premiums paid, making it a popular choice for those seeking life coverage and a potential financial return.3. Paid-Up Option
Some TROP policies offer a paid-up option. If the policyholder is unable to continue paying premiums due to financial constraints, they can convert the policy into a paid-up policy. This means that the coverage amount is reduced, but the policy remains in force without the need for further premium payments. The reduced coverage is typically calculated based on the premiums already paid and the premium payment term.4. Riders
Term Plans with a Return of Premium often allow adding additional riders or benefits to enhance the coverage. Common riders include critical illness riders, accidental death benefit riders, waiver of premium riders, and disability riders. Adding riders allows policyholders to customise their coverage based on their specific needs and provides added protection against unforeseen events.5. Premium Payment Options
TROP policies offer various premium payment options to suit the policyholder's preferences and financial situation. These options may include:
- One-time payment: The entire premium is paid in a single lump sum at the inception of the policy.
- Regular pay: Premiums are paid annually, semi-annually, quarterly, or monthly throughout the policy term.
- Pay till 60: Premiums are paid until the policyholder reaches the age of 60.
- Limited pay: Premiums are paid for a specific period shorter than the policy term, while the coverage continues for the entire term.
6. Death Benefit
Like traditional term insurance, a TROP policy provides a death benefit to the nominee in case of the policyholder's untimely demise during the term. The death benefit is paid as a lump sum amount and can help provide financial support to the family and dependents left behind. It can cover daily expenses, outstanding debts, children's education, mortgage payments, and other financial obligations.7. Maturity Benefits as Refund Amount
The maturity benefit of a Term Plan with a Return of Premium is the refund of premiums paid. If the insured survives the policy term, they receive the total premiums paid throughout the policy duration, excluding any applicable taxes, fees, or deductions.
This maturity benefit provides a lump sum amount that can be utilised as desired, such as for future financial goals, retirement planning, or other personal needs.
8. Surrender Value
Most Term Plans with a Return of Premium have a surrender value. If the policyholder wants to discontinue the policy before its maturity, they can surrender it and receive a certain percentage of the premiums paid. The surrender value varies depending on the policy's terms and conditions, including the policy duration and the premiums paid.
For example, for Single Premium Payment types, the surrender value is valid right after the complete premium is paid. However, for Regular and Limited Payment type policies, the surrender value is usually valid after two premiums are paid.
9. Tax Benefit
TROP policies offer tax benefits under the prevailing tax laws. The premiums paid towards the policy are eligible for tax deductions under Section 80C of the Income Tax Act, subject to the specified limits. Additionally, the death benefit received by the nominee is generally tax-free under Section 10(10D) of the Income Tax Act, ensuring that the family receives the full benefit without any tax liability.Who Should Buy Term Plan with Return of Premium?
Any individual can buy a Term Insurance plan with a Return of Premium. You can easily compare online term insurance plans with the return of premium option and take a decision based on your requirements. Analyse your age, income source, lifestyle habits and medical conditions to find the right policy.
A Term Plan with a Return of Premium can be a viable choice for the following people:
Single or Unmarried Individuals
For those who are single or unmarried with limited dependents or elderly parents to care for, a term insurance plan with a return of premiums can be advantageous. This plan provides dual benefits, ensuring that your loved ones are financially secure in the event of your passing and the payouts remain tax-free under relevant tax regulations.Newlywed Couples
As newly married partners, your financial responsibilities are likely to have grown. You'll need to plan for your spouse, dependent parents or in-laws, and any future children that may come along.Coverage for the Entire Family
When children enter the equation, your responsibilities multiply. Therefore, investing in life insurance solutions like a term plan with a return of premiums is essential to protect your spouse and children from potential future financial crises. Additionally, the maturity benefit can assist in covering essential expenses, such as your child’s college education.Senior Citizens and Retirees
A term insurance plan offering a money-back feature can prove invaluable if you are nearing retirement or already enjoying it. It secures your family’s financial future and ensures you have extra funds available during your retirement years.NRIs
For Non-Resident Indians (NRIs) with dependents in India, a term insurance plan featuring a return of premium can offer peace of mind for your loved ones. As an NRI, you can also benefit from tax relief on your maturity proceeds due to India’s Double Taxation Avoidance Agreement (DTAA), ensuring you are not taxed twice on the same income – in your country of residency and India.Some Relatable Real-Life Examples of Term Plans with Return of Premium
Ravi, a 28-year-old, Young Professional
Ravi, a software engineer, married and started thinking about his family’s financial security. He decided to purchase a term plan with a return of premium. This plan offered him a high sum assured at a low premium, ensuring his family’s financial stability in case of his untimely demise.
If Ravi survives the policy term, he will get back all the premiums paid. This feature appealed to Ravi as it provided a sense of security and savings. By the end of the policy term, Ravi received the total premiums paid, which he used to make a down payment on a new house.
Anita, a 35-year-old, Single Parent
Anita, a single mother, wanted to ensure her daughter’s future was secure. She opted for a term plan with a return of premium. This plan gave her peace of mind, knowing that her daughter would be financially protected if anything happened to her.
Moreover, the return of premium feature meant that if Anita outlived the policy term, she would get back all the premiums paid. This money could then be used for her daughter’s higher education. Anita felt reassured knowing she had a safety net for her daughter’s future.
Rajesh, a 55-year-old, The Retiree
Rajesh nearing retirement, was looking for a way to ensure his wife would be financially secure if he were no longer around. He chose a term plan with a return of premium. This plan provided a substantial death benefit at an affordable cost.
Additionally, if Rajesh survived the policy term, he would receive all the premiums back, which he planned to use as part of his retirement corpus. This dual benefit of protection and savings made the plan ideal for Rajesh, giving him peace of mind as he approached his retirement years.
Why Choose a Term Insurance Plan with Return of Premium?
Guaranteed Premium Refund at Maturity
A term plan with the return of premiums guarantees a lump sum payout of all premiums contributed when the policy matures, provided you outlive the term. You could receive a refund equal to 100% of the total premiums paid after the policy term.
This feature ensures that you and your family gain from the term insurance plan, with the premiums paid throughout the policy duration not going to waste. T&C apply.
Tax Savings
Similar to standard term plans, those with money-back options provide tax benefits to policyholders and their beneficiaries.
According to Section 80C of the Income Tax Act, you can claim a deduction of up to ₹1.5 lakhs for the premiums paid for the policy. Section 10(10D) also provides a tax exemption on the death and maturity benefits associated with the TROP plan.
Life Coverage and Death Benefits
Many term plans that offer a return of premium also provide whole-life coverage, ensuring that your family has financial support in the event of unforeseen circumstances. A term plan's flexible death benefit payout can be structured as a lump sum, regular income, or a combination.Enhance Risk Coverage with Riders
The most advantageous term insurance with a return of premium typically includes several optional riders you can select. These can support the foundational coverage of your TROP plan.
Here are term plans with return of premium, providing risk coverage along with additional riders:
1. Critical illness rider covers specific conditions like heart attacks, strokes, cancers, and certain heart surgeries. The range of illnesses protected by different insurers can vary, so individuals should carefully review the covered conditions before selection.
2. Waiver of premium rider eliminates future premium payments under particular circumstances in life insurance policies.
3. An accidental death benefit rider is an optional enhancement to a standard life insurance policy. It offers additional coverage for a modest increase in premiums.
4. Accidental Total and Permanent Disability Rider offers financial security for policyholders who face a permanent disability resulting from an accident during the policy's life.
How to Choose a Term Insurance Plan with Return of Premium?
1. Assess Your Needs
Evaluate your financial goals, your family's lifestyle, and future obligations. Determine the desired coverage amount and policy term based on your current income, outstanding debts, children's education, and other financial responsibilities. This assessment will help you determine the appropriate coverage that aligns with your needs.2. Compare Premiums
Obtain premium quotes from multiple insurance providers offering TROP policies. Compare the premium rates while considering the coverage amount, policy term, and additional features. Ensure that the premium amount is affordable and fits within your budgetary constraints.3. Understand Policy Terms and Conditions
Thoroughly review the terms and conditions of the TROP policy. Pay attention to details such as the policy term, premium payment period, surrender value, and exclusions. Understand the circumstances under which the premiums will be refunded and any penalties or charges associated with policy cancellations or alterations.4. Check the Claim Settlement Ratio
Research and evaluate the claim settlement ratio of the insurance company offering the TROP policy. A higher claim settlement ratio indicates a better track record of timely and hassle-free claim settlements. Choose an insurance provider with a good reputation for customer service and efficient claims processing.5. Consider Riders
Assess if you require additional coverage or riders to enhance your policy's benefits. Common riders include critical illness riders, accidental death riders, disability riders, and waiver of premium riders. Choose the riders that align with your specific needs and provide comprehensive protection for you and your family.6. Check the Insurer's Reputation
Consider the reputation and financial stability of the insurance company. Research their ratings and reviews to ensure they have a strong track record of honouring claims and providing excellent customer service. Opt for insurers with a high credit rating and a good reputation in the insurance industry.7. Read Customer Reviews
Read reviews and testimonials from existing policyholders of the insurance companies you are considering. This will provide insights into their experiences with claims, customer service, and overall satisfaction with the TROP policy. Consider the feedback to gauge the insurer's credibility and customer-centric approach.8. Compare Policy Features
Compare the features and benefits offered by different TROP policies. Look for features like accidental death benefits, terminal illness coverage, premium payment flexibility, conversion options, and additional benefits the insurer provides. Choose a policy that offers comprehensive coverage and additional features that suit your needs.Eligibility Criteria for Term Insurance with Return of Premium
Several key factors exist when considering a term insurance plan in India, you typically need to meet the following criteria:
Documents Required for Buying Term Insurance with Return of Premium
To apply for a Term Insurance with Return of Premium (TROP) plan, you will typically need the following documents:
Note: Depending on the insurance provider, each section requires one or two documents as proof.
How to Buy a Term Plan with Return of Premium Online?
Purchasing a term plan with a return of premium online is straightforward and efficient. Follow these six simple steps:
Step 1
Assess your financial goals, liabilities, and the amount of coverage you need.
Step 2
Research and compare different insurance companies.
Step 3
Choose a TROP plan that fits your budget and offers the coverage you need.
Step 4
Check the policy term, premium payment options, and any additional benefits or riders.
Step 5
Complete the application form with accurate personal and medical information.
Step 6
Select your premium payment frequency and pay online via debit/credit card or net banking.
Difference between Term Plan with Return of Premium Vs Pure Term Plan
Term Plan is not a usual investment product and is not directed towards the goal of wealth creation. However, it is a wealth protector in case of unfortunate circumstances.
Let’s discuss the striking differences between the Pure Term Plan and Term Plan with the Return of Premium:
Tax Benefits of Term Insurance with Return of Premium
Section 80C: Premium Payments
- Deduction Limit: Under Section 80C, the premium paid for a term insurance policy is eligible for a tax deduction, subject to a maximum limit of 1.5 lakh INR per financial year.
- Eligibility: To qualify, the premium must not exceed 10% of the sum assured if the policy is issued on or after April 1, 2012. The premium should not exceed 20% of the sum assured for policies issued before this date.
- Applicability: This deduction is applicable to individuals and Hindu Undivided Families (HUFs).
Section 10(10D): Maturity Benefits
- Tax Exemption: Any sum received under a term insurance policy, including the death benefit, is fully exempt from tax under Section 10(10D).
- Conditions: This exemption is applicable only if the premium paid does not exceed 10% of the sum assured for policies issued on or after April 1, 2012. The premium should not exceed 20% of the sum assured for policies issued before this date.
- TDS: If the policy does not meet the criteria mentioned above, a 5% tax deduction at source (TDS) will be applicable on the payout if it exceeds 1 lakh INR in a financial year.
Section 80D: Health Riders
- Deduction for Health Riders: If the term insurance policy includes health-related riders such as critical illness or accidental death benefit riders, the premium paid towards these riders is eligible for a tax deduction under Section 80D.
- Deduction Limit: The deduction limit under Section 80D is up to 25,000 INR for individuals under 60 and 50,000 INR for senior citizens. This limit is in addition to the limit under Section 80C.
FAQs about Term Plan with Return of Premium
Do I get my money back if I cancel my term insurance with a return of premium?
Is the return of premium under the term plan with return of premium taxable?
Are NRIs eligible to purchase term insurance in India?
What are a few cons of term plan with return of premium?
TROP has very limited options across insurance providers. So it's usually difficult to find a suitable insurance policy.
If you are looking at the cash value of your investment, you should rethink. TROP are more expensive than the regular term plans. The extra money spent could be saved somewhere better. Also, if you look at the large tenure of these policies, you will realise that the money that you receive as a refund is depreciated due to inflation.
Is the premium amount higher for TROP compared to traditional term insurance?
Can I customise my TROP policy with additional riders?
Is the death benefit different in TROP compared to traditional term insurance?
What happens if I miss a premium payment in TROP?
Can I surrender my TROP policy and receive the premiums paid before the completion of the policy term?
Can I renew my TROP policy after the completion of the policy term?
What is the importance of term plans with return of premiums?
Is term insurance with a return of premium worth buying?
What are the eligibility criteria for a term plan with return of premium?
What happens to the return of premium if I cancel the policy mid-term?
How do you choose the tenure of the TROP policy?
What is the death benefit under the return of premium term insurance plan?
Are there any riders available with TROP?
How does smoking habit affect the term plan with return of premium?
What is the grace period in the term plan with a return of premium?
Is a term plan with a return of premium more expensive than a regular term plan?
What happens to the Return of Premium if the policy is surrendered before maturity?
How long does receiving the return of premium after the policy matures take?
Other Important Articles Related to Term Insurance
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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