Insurance guarantees life guarantees by keeping you financially prepared to cover those expenses. Marriage, children’s education, your family’s future needs, elderly care, your health problems, and retirement; Life throws many curveballs. Insurance is a great risk management tool to plan for all these uncertainties.
The simplest and most popular form of insurance is the term plan, which provides protection for a fixed period or “term”. If the policyholder dies during the term, his beneficiaries receive a pre-determined amount, called the “sum insured”, which is the amount for which the policy was taken. There are no returns at the end of the policy as the premium is only for mortality risk and has no component of long-term savings that protects against the risk of market volatility.
Given the increase in life expectancy due to improved healthcare and healthier lifestyles, most people would expect to survive longer than their policy term. They are not convinced to pay for something that may not benefit them or their families in the long run.
“Why pay an annual premium on a policy that may never give you back anything?” , is a frequently asked question. The answer is a Term Plan with Return of Premium (TROP). Especially for those who expect their term plan to satisfy them with financial benefits, if they override their policy.
What is the return of the premium plan?
Return of Premium (ROP) is similar to a regular insurance policy but with one key difference – it returns the premiums to you when the policy matures. You pay the annuity during the term of the policy, and if you exceed the specified term, the policy refunds 100% of the premiums tax-free at the end of the policy term, known as a survival benefit.
In fact, ROP makes your policy virtually free of cost however, with more far-reaching monetary benefits. If you die within the term, the policy pays your beneficiaries the death benefit, a predetermined amount for which you pay the premiums.
Benefits of returning the installment
- 100% of premiums refunded: If you exceed the term of the plan specified with the ROP, the policy will return all premiums paid as survival or entitlement benefits. You can use this amount to meet any major financial requirements.
- Builds group savings: When you survive the term, the vesting feature acts like a retirement pool, which can be reinvested to meet your retirement needs.
- Ensures financial security: If the policy holder dies before the policy is due, the entire amount guaranteed is paid to the beneficiaries and the policy is terminated.
- Protects from misfortunes: Life is unpredictable. At any time in the term, the policy holder can be diagnosed with a terminal illness. In such cases, ROP plans (with terminal illness feature) treat the policy as full term and pay the full amount to the family at the time of diagnosis to facilitate monetary requirements. The full guaranteed amount is paid provided that all installments due are paid and none of them have been paid.
- Balances your investment: ROP costs more than a regular term plan due to the benefits it offers, making your premium quite expensive. To offset the costs, the policyholder can choose to recover 50% or 100% of the total premiums.
- Refund even on policy termination: Standard term plans expire once the policyholder stops paying their premiums and the payments are cancelled. However, the ROP option allows you to discontinue the premium payments if you wish, and if you waive the policy, all premiums paid up to that date will be reversed with the pre-determined deductions (waiver fee).
- Continuous protection: If the premium payments are stopped in a fixed-term policy, the policy will lapse and the beneficiaries will not be eligible for death benefits if the policyholder dies. Whereas with RoP, the policy remains in effect even if the policyholder somehow defaults on their premiums. However, this may affect payments and result in lower death or benefit benefit benefits.
- tax savings: Premiums paid for this policy are eligible for tax deductions of up to 1.5 thousand rupees per annum under Section 80C of the Income Tax Act 1961. The payment is exempt from income tax under Section 10 (10D) of the Tax Laws.
- Saves to GST: Term plans attract GST at 18% while with the Royal Oman Police, GST is 4.5% in the first year and 2.25% in subsequent years.
Here is an example to illustrate this:
Tensing Dorje is a 35-year-old unmarried young entrepreneur with aging parents and an unmarried older sister with physical challenges. He wants to invest in a 50-year insurance policy and 15-year premium term, for a guaranteed sum of INR 1 kroner.
Being financially savvy, he knows he’ll have to pay high general taxes (18%) on the purely term plan. However, with the ROP, the GST will be 4.5% in the first year and in subsequent years it will be 2.25%. He knows that with the ROP, he will have to pay a higher premium, so he compares the two options.
Although Tensing pays an additional premium of INR 1,31,198, for the term of the 50-year policy, it only comes to INR 7 per day. At such a low cost, when he reaches 85 years and the document matures, he receives INR 6,75,675 paid as base premium. Not to mention his family’s financial security.
How does the return on the insurance premium provide financial protection?
Here are some examples that show you how the ROP makes financial sense.
- Case 1: Swati Mishra is a 35-year-old single mother with twins. She works as an accountant in a law firm. To secure the future of her children, she has purchased the term plan with ROP option for a guaranteed sum of INR 1 kroner. This will cover her for 50 years, up to age 85. She is opting for a limited premium payment plan, where you will pay an annual premium of INR 35,672 (excluding GST) for 15 years only but have full life insurance cover. It is opting to pay a flat fee when the policy is due.
If Swati survives the term of the policy, she will receive a lump sum of INR 5,35,080 at the maturity of the policy (i.e. refund of all her premiums paid), provided that she is not in default of one payment. However, if she dies within the policy period, the twins will receive a lump sum of INR 1.
- Case 2: 40-year-old Srikanth Subramaniam has a wife and teenage son. To secure his family’s future, at the age of 30, he purchased term insurance with the Royal Oman Police for a guaranteed sum of 1 INR. The policy will cover him for 30 years up to the age of 60. He has opted for a limited installment payment plan, where he has to pay an annual premium of INR 17,927 (excluding GST) for 20 years and has opted for a flat-out payment on the policy to complete.
Unfortunately, Srikanth was diagnosed with cancer at the age of 50 with only a few years left to survive. The policy will pay his family a guaranteed sum of INR 1, which they can use for his treatment. If Srikanth lived up to 60 years, his installments of INR 3.58,540 would be refunded to him.
A term plan with return of premium (TROP) is slightly more expensive than a standard term plan. However, its long-term benefits outweigh the investment for its guaranteed returns.
Whether you survive politics or not, it offers financial benefits for your family’s future. The ROP is ideal for people who do not want to lose out on insurance premiums and want some kind of cash return from the policy.