Why Not To Purchase Term Insurance With A Return Of Premium Option?

One of the most common and purest forms of life insurance is Term Insurance, which is broadly available in the market. The term insurance plan is a scheme to cover life of a person and get an assured amount to nominee in case if any unforeseen even happens but before purchasing any kind of Insurance you should know how much insurance do you need. The premiums of Term Insurance are very less as compared to that of ULIP or an endowment policy. You can get your life secure for a cover of Rs 1 crore with a mere premium Rs 7000(It depends on your age,policy term etc).

However, the sum assured and the premiums of the scheme may differ from one insurer to another. With the help of term insurance plan you can invest your surplus in other investment class for wealth creation in long term.

Must Read : Why Real Estate is a dull Investment compared to mutual fund

You can select Policy Term for a period of 30-40 years depending on your age but i would suggest you should have term insurance policy only up to 60 years

Once the policy is matured then at the time of maturity of the policy, the insurer gives back the entire premium paid by the policyholder in Term Insurance with Return of Premium Option. But TROP gives very small internal rate of return (IRR) and you get the money in case if you survive the opted policy term.


This will be complicated for you to understand without the help of the example, let us go step by step in order to understand Why TROP is not useful

Following figure illustrates some of the renowned companies offering term insurance plan with return of premium. Different companies have different premium and plans.

There is huge difference of premium you pay for term insurance plan with a return of premium(TROP) and the pure term insurance.

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Let us understand by considering an example 

Mr. Rajesh Singh,30 years old wanted to purchase a Term Insurance for 30 Year Term i.e thinking he would retire at 60 years. The insurance agent (agent can be offline or policy bazaar or anyone) gave him two options of the term insurance plan with a return of premium and other one of without the return of premium. 

Mr. Rajesh inquired about the difference between both and he found the difference below 

The sum assured of life is Rs 1 Crore with the annual premium of Rs 25000 in the case of term insurance plan with a return of premium and annual premium of Rs 10000 in case of term insurance plan without return of premium. 

Death benefits remains Rs 1 Crore in both the policy types. However, the maturity benefits will not remain same in both cases. 

If Mr Singh survives the policy term then he would get a his premium back of Rs 7.5 Lakhs (Rs 25000*30 years), whereas in case of without return of premium will give no benefit to the policyholder. 

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Mr. Singh after understanding the difference between both the policies was attracted towards the Term insurance plan with a return of premium. The agent also suggested him the policy with return of premium (As they always do for a need of higher commission and or may be with lack of knowledge)

Nevertheless, consider the same situation and have a look from other perspective. Say that Mr. Singh does not pay the rest of the Rs 15000 (Rs 25000-Rs 10000) and goes for the option of Pure Term insurance.Assuming Mr Singh being a risk averse person could invest that Rs 15000 annually in PPF account considering a rate of interest 8.10% percent for the 30 years. He would have got Rs 18,85,923 instead of Rs 7,50,000

(18,85,923= 15000*(1+8/100)^30), which is far more than the maturity benefit in TROP. He can earn more Rs 11,35,923 (Rs18,85,923-Rs7,50,000) by investing in PPF account.

Mr. Rajesh Singh can earn more as compare to this policy, when he will invest in the PPF account. However, we know that the safest and best way to generate the tax-free returns is by investing in the PPF accounts. 

Let us take a different scenarios where Mr. Rajesh Singh opted for another option like investing the rest of the amount in the diversified equity mutual fund through SIP. If he will deposit sum of Rs 15,000 per annum for 30 years at the compound annual growth rate of 12 percent then he will fetch the amount of Rs 40,69,389, which is really a big amount by the formula shown below. 

The profit earned by Mr. Rajesh Singh at the time of the maturity was Rs 33,19,389 (Rs 40,69,389- Rs 7,50,000).
 
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Now let us see the difference between PPF account and diversified equity mutual fund through SIP with the help of the table shown below 

In case if you are purchasing a term insurance with return of premium please keep in mind TROP is a TRAP

I hope i have addressed everything pertaining to Term Insurance with returns of premium, in case if you have any doubts or clarifications do let me know your thoughts via comments

About the author
Vipul is an MBA in Finance, PMP Certfied Professional and into software sales for Asset Management Companies, Pension Fund and Stock Brokers from last 16 years.

Vipul believes that the amount of financial information flowing our way is probably 10 times more than what it used to be 15 to 20 years back due to the advent of newer forms of communication.
All this information is creating an information overload in the minds of individuals resulting in analysis paralysis and he helps them select the right decision while creating a Goal based financial plan.
In case if you need a Financial Plan please connect to him on vipuls1979@gmail.com


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Disclaimer  :-

The Article is only for information purposes and Vipul Shah (https://investkiyakya.blogspot.com) is not providing any professional/investment advice through it. The article does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. https://investkiyakya.blogspot.com disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this article, including without limitation the implied warranties of merchantability and fitness for a particular purpose. https://investkiyakya.blogspot.com and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this guide. Use of this article is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. https://investkiyakya.blogspot.com does not warrant completeness or accuracy of any information published in this guide. All intellectual property rights emerging from this article are and shall remain with https://investkiyakya.blogspot.com. This article is for your personal use and you shall not resell, copy, or redistribute this article , or use it for any commercial purpose. All names and situations depicted in the article are purely fictional and serve the purpose of illustration only. Any resemblance between the illustrations and any persons living or dead is purely coincidental.

What,Why and Different Types Term Insurance with Riders

You have always strived to give your family the best in life and have ensured they fulfill their dreams. However, in your heart, you always feel insecure about their future in your absence. Will your family be able to sustain the same lifestyle even in your absence?

To put all your fears to rest and to provide you with peace of mind sometimes the simplest choice is the best one for you. A pure term plan is a simple way to get comprehensive protection at an affordable price and protect yourself and your loved ones against the uncertainties that life may throw at you.

There are many additional riders like Accidental Death Benefit , Critical Illness, Waiver of Premium, permanent disability etc which make Term Insurance the most economical ideal insurance plan. An insurance cannot be purchase arbitrary you should know how much insurance do you need   

Why Term Insurance ?

• Comprehensive coverage at affordable cost.
• Online and Convenient
• Provide financial protection for you and your family
• Customize your plan with choice of cover options
• Insurance cover available up to age 75 years 
• Single, Limited and Regular premium payment options to choose from
• Attractive premium rates for non tobacco users
• Tax benefit as per prevailing tax law

Tax benefit as per prevailing tax law   

Must Read : Why Term Insurance is required till 60 Years

I would take you through most of the term insurance available in market with an illustrative example, before heading towards the article let us understand what is a term insurance.

What is Term Insurance ?

Term Insurance provides a benefit amount in the unfortunate event of death of the Life Assured anytime during the policy term. This amount would help your family to pay any outstanding debts or fund the day to day expenses, thus easing the financial worries of your family.

1-> Pure Term Insurance

Example : 
Mr Jeevan, Age 35 purchased an online term insurance of Rs 50 Lakhs and a 20 year team for a premium of Rs 9263

In case of death of any time during the policy term, Jeevan’s nominee will receive Rs 50 Lakhs as one-time lump sum payout. The policy will end after the payment is made

2-> Term Insurance + Fixed Income Protection 

In Fixed Income protection nominee will start receiving x amount every month, till the time policy term was insured.
Example :

Mr Jeevan, Age 35 chooses Fixed Income Protection Payout option of Rs 50000 per month for a 30 year term. In case his death happens immediately after payment of 7th annual  premium, i.e when he has turned 41 years old, his nominee would receive sum assured of Rs 50 Lakhs plus Rs 50000 per month till such time Jeevan would have attained 60 years of age or 10 years after his dies which ever is earlier.

Few Insurance companies also provide to take all monthly installments as a lump sum at the time of claim settlement.

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3-> Term Insurance + Increasing Income Protection

Assuming the same example from above, Jeevan chooses the Increasing Income Protection payout option of Rs 50000 Per month for a 30 year term.


Your coverage increases every year under this option to secure you and your family from the impact of rising costs due to inflation. You can choose the monthly amount which will increase at a simple interest rate of 10% from second policy year and thereafter every policy year  

  
In Jeevan's case his death happens immediately after paying 7th annual premium, i.e. when he has turned 41 years old, his nominee would receive Rs 50 Lakhs as lump sum payout and also will start receiving 80,000 every month in the 7th policy year, which will increase every subsequent year, at a
simple rate of 10% of the monthly payout chosen at  till such time when Jeevan would have attained 60 years of age or 10 years from the date of death, whichever is higher. This clause varies as per Insurance Companies.

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4-> Increasing Cover Option 

As you scale new heights in your life, your income rises and so does your responsibilities. 
You got married, birth of a first child, Purchase of home through home loan which is a liability.
With this option, your sum assured increases with your increasing responsibility. You can choose to enhance your sum assured by 5% simple p.a. or 10% simple p.a. at inception depending upon your needs. On every policy anniversary, your sum assured will increase by 5% or 10% of the initial sum assured without any increase in your premium amount

Let say you purchase a policy of Rs 50 Lakhs at the age of 35 after 1 year that is when you attain age 36 your sum assured would be increased by 5%, new sum assured would be Rs 5250,000 it goes on up to 60 years or the age you have chosen the policy term.
 
5-> Decreasing Cover Option 

This is a kind of term insurance which provides a cover that decreases at a predetermined rate over the period of the policy while the premium remains constant. The core logic behind decreasing term insurance is that a person's needs for high levels of insurance decreases with age as his liabilities (like home or car loan) decrease or no longer exist.

For instance, if you buy insurance cover for Rs.50 lakhs for 20 years, the cover may decrease by 5% each year. This way, after 10 years, you would be left with cover of Rs.25 lakhs instead of Rs.50 lakhs that you started with. Decreasing term plans are generally used for mortgage or loan protection. Let say you purchased a home through home loan at the age of 35 , if everything goes fine by the time of 55 Years (assuming a 20 year home loan) you must have completed the home loan, So your liabilities are reduced, got the point....
Another advantage of buying such a plan is that its premium is cheaper when compared to normal term insurance.

Must Read : How to do retirement planning

Let us now understand different kind of riders provided by insurance companies 

Riders are add-ons bundled with your life insurance policy given at the same time when the policy is issued, for a cost.

Accident Benefit Rider

Accidents are unfortunate and sometimes fatal.It is better to buy, by paying a little extra, an accident disability cover with the term plan. The premium is around Re 1 per thousand of sum insured. The rider helps if the life assured dies or is permanently disabled due to an accident. If the life assured losses eyesight or legs or hands, he is paid the sum assured. The basic life cover continues thereafter.

It is better to buy an accident disability rider along with the life insurance policy due to the ease of purchase. But since, in life insurance, the sum assured for the accident disability rider is capped much below the sum assured offered for life cover, it is also better to buy a separate accidental benefit policy also to enhance the cover.

Critical Illness

The Critical Illness Benefit rider is a very useful rider as an addition to your life insurance plan. As per this rider, in the event of diagnosis of a critical illness during the policy term, an amount equal/less to the sum assured in the critical illness rider is payable to the insured. The diagnosed illness must be within the purview of the insurance company's defined categories of critical illnesses.
 
Companies do have a maximum limit for this rider and a clause that states that benefits will be paid only if the disease has occurred after six or 12 months of commencement of the policy.
 
If a claim is made under the rider, usually the benefit terminates and hence, no subsequent premiums are charged for this rider

Must Read : 9 Secrets to Choose Mediclaim Policy

Waiver of Premium (WOP)
  
This is very simple, WOP waives future premiums if the insured becomes disabled.
Mr. Kumar is a 35 year old salaried professional, who is married, and has a 4 year old child. He is a responsible individual who always takes care of his family. In order to plan for his family‟s financial security, he buy a term insurance   (Rs. 1 Crore sum assured with 35 years term), on his life, making his wife the nominee under the policy. Further, in order to ensure there is no discontinuity in policy benefit, he also buys Waiver of Premium Rider at a nominal price

Mr. Kumar is a 35 year old salaried professional, who is married, and has a 4 year old child. He is a responsible individual who always takes care of his family. In order to plan for his family‟s financial security, he buy a term insurance   (Rs. 1 Crore sum assured with 35 years term), on his life, making his wife the nominee under the policy. Further, in order to ensure there is no discontinuity in policy benefit, he also buys Waiver of Premium Rider at a nominal price

Must Read : How to plan your child education Planning

For example Mr.Kumar meets with an accident and loses both his arms or diagnosed with Critical illness :- Future premiums will be waived off till the end of policy term. 

I hope i have addressed everything pertaining to Term Insurance , in case if you have any doubts or clarifications do let me know your thoughts in comments 

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Who doesn't like a financial healthy life,In case if you want one contact me for Financial Planning, please do drop an email to me at vipuls1979@gmail.com. I would be happy to assist you


Mutual Funds & Insurance Related Articles :-
Benefits of SIP
What is SWP in mutual Funds
9 Secrets to choose right mediclaim
How to Plan for your Child Education Planning
How to do Retirement Planning
Best 3 Large Cap Mutual Funds for SIP in 2016 
Best 3 Midcap Mutual Funds for SIP in 2016
Best ELSS Tax Savings Mutual Funds for SIP in 2016
Why you should not buy ULIP
How to Select Mutual Fund for Portfolio
Liquid Funds are better alternative than Savings Bank account
What is FMP in Mutual Funds
Complete Guide on Monthly Income Plans
Complete Guide on Credit Opportunities Fund
How to Save Tax using Equity Linked Savings Scheme
How to Budget Your Money
How Much Insurance Do You Really Need
Why Should you buy Term Insurance Upto 60 Years
5 Must Have Insurance Policies for Women

Disclaimer  :-

The Article is only for information purposes and Vipul Shah (https://investkiyakya.blogspot.com) is not providing any professional/investment advice through it. The article does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. https://investkiyakya.blogspot.com disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this article, including without limitation the implied warranties of merchantability and fitness for a particular purpose. https://investkiyakya.blogspot.com and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this guide. Use of this article is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. https://investkiyakya.blogspot.com does not warrant completeness or accuracy of any information published in this guide. All intellectual property rights emerging from this article are and shall remain with https://investkiyakya.blogspot.com. This article is for your personal use and you shall not resell, copy, or redistribute this article , or use it for any commercial purpose. All names and situations depicted in the article are purely fictional and serve the purpose of illustration only. Any resemblance between the illustrations and any persons living or dead is purely coincidental.