The proposition is simple--it is a term plan, which pays in case of death of the insured but returns the full premium if the policyholder survives the policy term. Sounds like free insurance, right? A perfect trap for the policyholder who always thought paying premium for a pure insurance product was a waste.
Though these plans cost 2-3 times more than a regular term plan, there are takers. Many customers expect some sort of return from life insurance policies, at least the capital. Since these products click with many , insurers like PnB Metlife also have a critical illness version of premium-back plans.
A term policy for a 30-year-old that covers him for `1 crore for a tenure of 25 years will cost around `10,000. On the other hand, the term return of premium (TRoP) version of the same plan would cost `30,000. `20,000 more every year for 25 years. Is it wise?
Well, here is the simple math. Instead of paying the insurer, if you had put that `20,000 every year in a fixed deposit (FD) that earned an 8% return, you would have Rs 15.79 lakh at the end of 25 years. The insurer on the other hand is going to pay back `7.5 lakh if it's a 100% return-of-premium plan.Different plans offer different return -of-premium policies. For instance, while some plans do not pay back the first year premium, others like PnB MetLife and Aviva Life's return of premium plan gives an additional 10% of total premium paid, Birla Sun Life pays 100-125% of premiums paid, depending on the product variant you choose. In case you had bought the 125% TRoP , you would still get back only `9.37 lakh, which is `6.4 lakh less than what an FD could have accumulated.
Apart from death, some of these plans also cover critical illness or have a built-in personal accident cover. Even if you consider the price of these additional covers, the product is still overpriced. A `10 lakh critical illness plan for a 35-year old costs `4,500 yearly .
Also, these plans can be quite complicated to understand. Some of the TRoP have fancy short-term premium payment options wherein you get protection for 20-30 years but pay premiums for only If additional premium paid is put in an FD that earns 8%, the money would grow ti `15.79, a difference of `7.54 lakhs. If you invest in an equity MF plan that gets around 12% return, you'll accumulate a corpus of `29.86 lakh, a difference of `21.61 lakh. 10-11 years. This is an even bigger ripoff as you are paying a higher premium during the initial term.
A lakh invested over 10 years will have a higher compounded interest than it being spread over 20 years.Meaning, you are foregoing a larger interest if you pick the short-tenure premium payment option.
The only advantage TRoP plans have over regular term plans is that they come with a `paid-up' option. So, if you default on premium payments or stop paying altogether, the policy continues, but with reduced benefits.
While the premium paid will be returned at maturity , the nominee will get a reduced sum assured if the insured dies
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