Term insurance is a popular insurance product in which an individual pays a premium for a fixed period of time and, in case of death during that period, the insurer pays a predetermined sum of money to the beneficiary.
However, with the advent of technology and innovation, insurers have now introduced a new variant of term insurance, called term insurance plans with return of premium (TROP). This article aims to explain what TROP is and how it differs from traditional term insurance plans.
What is a TROP?
TROP is a variant of term insurance plan that offers a refund of premiums paid if the policyholder outlives the policy term. In other words, if the policyholder survives the policy term, the insurer returns all the premiums paid during the policy term, thus making it a zero-cost insurance plan.
However, in case of the policyholder's death during the policy term, the insurer pays the sum assured to the beneficiary, just like in traditional term insurance plans.
How does TROP work?
TROP works like any other term insurance plan, except for the return of premiums feature. The policyholder selects the sum assured and the policy term and pays the premium for the entire policy term upfront or in regular instalments.
In case of the policyholder's death during the policy term, the insurer pays the sum assured to the beneficiary. However, if the policyholder survives the policy term, the insurer returns all the premiums paid during the policy term.
For instance, if a 30-year-old individual purchases a TROP policy with a sum assured of Rs. 50 lakh for a term of 30 years and pays an annual premium of Rs. 10,000, the total premium paid at the end of the policy term would be Rs. 3 lakh.
If the policyholder survives the policy term, the insurer would return the entire premium of Rs. 3 lakh. However, if the policyholder dies during the policy term, the insurer would pay Rs. 50 lakh to the beneficiary.
What are the advantages of TROP plans?
Zero-cost insurance: TROP provides the policyholder with a zero-cost insurance plan. If the policyholder survives the policy term, the insurer returns all the premiums paid during the policy term, thus making it a cost-free insurance plan.
Tax benefits: TROP provides tax benefits under Section 80C and Section 10(10D) of the Income Tax Act. The premiums paid are eligible for tax deductions under Section 80C, while the sum assured and the premiums received are tax-free under Section 10(10D).
Higher coverage: TROP offers higher coverage than traditional term insurance plans at the same premium rates. As the insurer returns the premiums paid on survival, the cost of insurance is reduced, allowing the policyholder to opt for higher coverage at the same premium rates.
What are the disadvantages of TROP plans?
Higher premiums: TROP premiums are higher than traditional term insurance plan premiums as the insurer returns the premiums paid on survival. Thus, if the policyholder dies during the policy term, the insurer pays a lower sum assured than the premiums paid.
Limited flexibility: TROP offers limited flexibility compared to traditional term insurance plans. As the premiums are paid upfront or in regular installments, the policyholder cannot change the sum assured or the policy term during the policy term.
Lower returns: TROP offers lower returns compared to other investment products like mutual funds or stocks. As the premiums are refunded on survival, the policyholder does not earn any returns on the premiums paid.
In conclusion, TROP can be a suitable option for those who wish to have a safety net for their loved ones in case of untimely death. It offers the best of both worlds by combining the features of term insurance and savings plans. However, policyholders must assess their financial goals, risk appetite, and affordability while choosing the right insurance plan.