Return of premium term plans can be avoided

You will be better off buying a plain- vanilla term plan, which costs less, and invest the balance in MFs

In an advertisement for a car, the buyer asks repeatedly: ‘How much does it give?’ referring to the car’s mileage. Returns are a top-of-the-mind concern even among insurance buyers, which is why several insurers today offer Term Return of Premium (TROP) plans. In the regular term plan, the customer gets nothing if he survives the policy term.

According to an official from Aegon Life Insurance, the demand for TROP comes from Tier-II and Tier-III cities. “These customers want life cover but also want returns. Since a traditional savings plan with a high sum assured will be very expensive, they prefer TROP," he says.

According to experts, buyers will be better off with a regular term plan combined with an investment plan. “We don’t recommend TROP. Assuming you pay premium of Rs 10,000 a year for 30 years and get back Rs 3 lakh, after 30 years it will have very little value. Instead, if you were to bundle a regular online term plan with a good guaranteed return plan, that will fetch you higher returns," says Yashish Dahiya, chief executive officer and co-founder, Policybazaar.com.

Typically, a traditional insurance plan, like an endowment or money back plan, gives 3.5-4 per cent returns. A better option would be an equity mutual fund or even the new age Unit Linked Investment Plans (Ulips).

“Today, there are Ulips available online that have very little charges. If you choose the option to invest in government securities, the return is guaranteed and tax-free. Equity will definitely give 10-12 per cent per cent returns over a 30-year period,” says Dahiya.

The premium for TROP can be three-to-four times higher than the premium for a regular term plan, or even more if in case of offline plans. Recently, Exide Life Insurance launched a TROP and discontinued its regular term plan. The plan is available only through offline distributors. According to the company's Executive Vice-President (Products Management) Sanjay Tiwari, a TROP is a diluted savings plan and falls in between a pure term and savings plan.

In case of Exide Life Smart Term Plan, the Classic variant, a 20-year policy with a sum assured of Rs 50 lakh for a 35-year-old has an annual premium of Rs 25,824. The guaranteed return is Rs 5.16 lakh. In comparison, you can get a regular term plan of Rs 1 crore for Rs 10,156 a year in case of HDFC Click 2 Protect Plus and Rs 10,012 in case of ICICI iProtect, according to data from Policybazaar.com.

According to Deepak Yohannan, founder and CEO, MyInsuranceClub.com, such plans are popular among insurance agents, and that is why insurers offer them. “A normal term plan will give far better coverage than a TROP," Yohannan adds.  For instance, in case of Aegon Life Insurance’s 20-year policy for a 35-year-old with a sum assured of Rs 1 crore, the annual premium for TROP is Rs 28,704, while the premium for its regular term plan is Rs 10,191, says Yohannan. The TROP will return Rs 5.74 lakh at the end of the term. Both plans are available online.

The only advantage of TROP is that the guaranteed return is tax-free, says Balakrishnan Venkataramani, proprietor, Vensiva Financial Solutions. “Let us assume you purchase Aegon Life’s regular term plan and invest the difference, that is, Rs 18,513 over 20 years. It can generate approximately Rs 9.15 lakh at eight per cent returns (bank fixed deposits), Rs 14.94 lakh at 12 per cent, and Rs 21.82 lakh at 15 per cent return (equity MFs). Equity MF returns are also tax-free.”