The insurance industry in India is constantly seeking to innovate and introduce new products that are more appealing to investors. ‘Term plans’ and ‘term returns of premium’ are probably familiar to everyone. The term ‘zero cost term insurance plans’ refers to a new category of term plans that the life insurers have lately added.
Now with the success of term plans in the last few years, we all are quite aware about its functions. They are basically a plan wherein the policyholders buy a plan for 30-40 years and pay the premiums throughout the term. In case of his unfortunate demise, insurance companies will pay the family sum assured and policy ceases.
If the policyholder survives after his coverage period, he doesn’t get anything from the insurance companies. However, Indians were not content to buy such products as they are used to getting some amount at the end of the policy period.
To fill that gap, insurance companies bought out term returns of premium plans (TROP), where policyholders will get their premiums back once the policy terms end. To give an example, if a 30-year-old buys TROP and has a sum assured of ₹1 crore for a period of 40 years, paying premiums of ₹30,000 per annum. If he passes away during the policy term, the family will get ₹1 crore, but if he survives the 40 years policy period, insurance companies will pay him the premiums paid over the 40-year period.
But here is the catch, the premiums for TROP are far higher than the pure term plans and that is the reason it has not become as successful as envisaged by the insurance industry.
But now life insurers players have further tweaked the term plans to zero cost term insurance plans. So, these plans are a mix of pure term plans and TROPs. Here we will try to explain with one small example.
Let’s say, a 30 years old buys a zero-cost term plan for a period of 40 years he will have an option to exit at 25 years or 30 years. Once exited he will get the premiums back (excluding taxes). The tenure of the exit option will vary from one insurer to another. Again, here also if the policyholder passes away during the term of the policy, their family will get the entire sum assured amount.
One of the major advantages of zero cost term insurance plans is that their premiums are quite attractive compared to TROP. So, it’s better to opt for zero cost term insurance plans compared to TROPs.
The basic premise of buying this policy is that policyholders can discontinue the plan if they feel that they don’t need a life cover. This can be due to enough savings for the retirement or even the need for the money after the retirement.
Unfortunately, in India many people still stay away from buying pure term plans as they don’t offer any maturity benefits. Zero cost term plans can be the best product category for such people who want their money back or they no longer have liabilities and premiums are lower compared to TROPs.
Having said that, it's just the start for zero term insurance plans and the market is at a very nascent stage. Not all the insurance companies offer such products, but if the current product gets success, we might see more players jumping in and launching zero cost term insurance plans.
I would say that before buying any term insurance plans or zero cost term insurance plans, policyholders should compare premiums, features, customer services and claim settlement ratio before buying any life insurance products. Buying of term insurance plans or any of the other two categories is must for every adult in India, so that family can be secured in the absence of the policyholders.
Rakesh Goyal is the Director of Probus Insurance, an InsurTech broking company selling both life and non-life insurance policies.