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Term Insurance December 29, 2020
A term life insurance plan can help ensure the financial harmony of your family members in your absence. The insurance company will pay the death benefit to the nominees you choose at policy inception. But term plans come in several variants – one is a standard term plan that functions as told above. Whereas some term plans come with additional features such as survival benefits that you don’t get with a standard term plan. Does that make such plans a better option than a standard term plan? It’s something you need to know before choosing a particular term plan for yourself. We will explain both these plans so that you could decide better. Let’s begin!
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Choosing between the two requires proper cost-benefit analysis. See which side is the heavier one – cost or benefit – before choosing from the two. Let’s analyze these aspects for a standard term plan and a return of premium term plan.
A standard term plan lets your dependent family members get the sum assured amount if you die during the policy term. But if you survive till the policy term, you won’t get anything from the insurance company! This is where a term plan with a Return of Premium’ can grab your attention as it returns you the premium paid over the policy term.
As there are no survival benefits associated with a standard term plan, the premium amount remains less compared to when you have a return of premium to your plan. On average, the premium for a return of premium plan can be 2-4 times the premium for a standard term plan. For example, the sum assured remains INR 1 crore for both standard term plans and return of premium plans. For a standard plan, you have an annual premium of INR 10,000, while the premium amount could go up to 30,000 for the return of premium plans. If the policy term is 30 years, the premium outgo will amount to INR 3,00,000 with a standard plan. Whereas the total premium outgo will attain the sum of INR 9,00,000 with a return of premium plan, resulting in an extra premium worth INR 6,00,000. Yearly, the difference comes as INR 20,000. If you invest the same INR 20,000 annually in products like mutual funds, gold and bonds, you could get more than the premium payable with a Return of Premium Plan. An annual investment worth INR 20,000 in mutual funds at an assumed rate of 12% will lead to a return of around INR 50 lakh, half the sum assured amount of INR 1 crore.
Both term plans and term plan with return of premium can convert into a paid-up status on not paying the premium after a specified period. If you don’t pay the standard term plan premium after it acquires a surrender value, it will get reduced to a paid-up status. The surrender value is acquired once you have paid the premium for 2-3 years. The exact time could differ from one plan to another. The paid-up status means the sum assured amount upon death will reduce significantly. However, if the policy does not acquire a surrender value, and you stop paying the premium, the policy will lapse. The same thing happens in the case of Return of Premium Term Plans.
Since the premium amount in Return of Premium Term Plans remains higher, chances of premium payment defaults are more. So if you meet with death and/or accidental permanent total disability, you will get the paid-up sum assured. The insurance company calculates the same using the formula given below –
Paid-up Sum Assured = Sum Assured x Number of Premiums paid/Number of Premiums Payable Under the Policy
For instance, the policy comes with a sum assured of INR 1 crore for a policy term of 30 years. You choose the return of premium option where you will need to pay an increased premium worth INR 25,000 annually. After 3 years, you stop paying the premium, and the policy acquires a paid-up value. So, if you die during the policy term, the nominee will get the paid-up Sum Assured of INR 11 lakh (approx.). Check the calculation below.
Paid-up Sum Assured = 1,00,00,000 x 36/324 = INR 11,11,111.11
But some insurance companies also offer a certain percentage of the annualized premium to nominees in such a case. So, you need to check the policy wordings of both standard plans and return of premium plans carefully.
We have explained through this post the working of standard term plans and term plans with a return of premium. On the cost side, a standard term plan is an outright winner. The lack of survival benefit does tilt the balance towards the return of premium plans for a while. But there are investment options by which you could get much more than the premium you could get in return upon surviving till the entire policy term. So, think about that too! Yes, investments will come with their own set of risks. So, you will need to choose investments based on their long-term performance. An impressive performance for the short term might tempt you more, but it’s the sustained performance that counts in the end!
However, we are not telling you to prefer standard term plans over the return of premium term plans. The choice is yours! A thing that works the best for a particular individual may not replicate for others. See what you are comfortable with and choose the plan that goes in sync with you.
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