A Definitive Guide to Term Plans with Return of Premium

A term insurance plan is an essential component of every financial portfolio, ensuring life coverage for policyholders and death benefit payouts for their nominees in case of their demise within the policy period. It is a good plan to invest in if you want to secure your family’s financial future at an affordable price.

It is very easy to understand what is term insurance, as it is a simple (often called pure) insurance product with many practical benefits. For example, you can get tax deductions up to Rs. 1,50,000 under Section 80C (Income Tax Act of 1961) on premium payments while being able to add riders to cover more events like raiders for accidental death or disability, critical illnesses, and so on.

Now, there is one more benefit or option you can avail of, i.e., a return of premium. Although the base term plan is a sound investment for anyone, there is sometimes a concern about the lack of no maturity benefits if the policyholder survives the policy term. Life insurance companies have responded to this by offering term insurance plans with a return of premium option. It means that if the policyholder lives to the end of the policy term, the life insurance company will refund the entire premium paid for the policy to date after applicable deductions. Let us learn more about the same in this article.

How does a term insurance plan with premium return work?

These plans work similarly to a regular term plan. The policyholder chooses the coverage amount and the policy tenure and pays a premium to keep the policy active for the chosen term. Please note that the premiums for a term plan with a return of premium option will be higher than a base term plan. Other than this, the main difference between the two comes in the form of maturity benefits.

Assume a person purchases a term insurance plan with a return of premium option. Let us assume that there is life coverage of Rs. 1 crore for a tenure of 30 years, with an annualized premium of Rs. 10,000. If the life assured dies within this period, then the sum assured will be paid to the beneficiaries.

However, if the policyholder lives until the end of the policy term, then the insurance company will refund the entire premium paid till then, i.e., Rs. 10,000*30 years, which is Rs. 3,00,000. However, note that there will be deductions like GST, underwriting extra premiums, and premiums paid for riders, if any, from this amount before it is paid out to the policyholder.

The Advantages of a Term Plan with Return of Premium

• Guaranteed benefit at maturity: As previously stated, the most significant advantage of purchasing a return of premium plan is the refund at maturity. Thus, it ensures that the policyholder does not lose the premiums paid over the years. Therefore, these plans can give you a decent amount to meet future goals.

• Policy continuation, even if premiums are not paid: Return of premium term insurance plans offer paid-up options in the event that a policyholder fails to pay premiums after a certain duration. This benefit is mainly for those who do not have a fixed or consistent source of income and thus risk missing some premium payments. If a policyholder stops paying premiums after three years, the term insurance policy will continue but with reduced benefits. If the life assured happens to survive the policy term, then the insurer will return the premium paid at maturity. If the life assured dies within the policy period, then the beneficiaries will receive a reduced sum assured.

• Tax advantages: Under Section 80C of the Income Tax Act of 1961, the premium paid on these plans is tax-free up to Rs. 1,50,000. Furthermore, the amount received at maturity is tax-free under Section 10 (10D) of the Income Tax Act.

• Surrender Value: If a policyholder surrenders a return of premium term insurance plan, then the policy coverage is terminated. However, the insurance company may return a portion of the premiums paid till then.

Many customers value the return of premium term insurance plans since they come with a guaranteed return after a particular duration. Those taking insurance early in life will naturally strive to remain fit and healthy throughout the entire plan period, enabling them to get a lump sum amount for meeting future requirements. At the same time, if something were to happen to the policyholder, then the family still receives the sum assured or death benefits. Hence, combining possible future savings and existing life coverage makes these policies more attractive to people today.

However, those considering these term insurance plans must carefully select the sum assured amount to ensure adequate coverage with or without the premium return. At the same time, you must pay your term insurance premiums on time to keep your coverage undisturbed.