Hidden Clauses in Return of Premium Term Plans You Should Know
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Mumbai (Maharashtra) [India], May 8: Return of Premium (ROP) term insurance plans are becoming highly popular these days among the masses who aspire to get financial security along with a rider of refund of premiums if the insured survives beyond the policy tenure. Though the policy carries thrilling returns, certain vital conditions are hiding behind such policies, and being well-aware of this information helps in avoiding unnecessary surprises and taking a prudent decision.
What is a Return of Premium Term Plan?
Before diving into the hidden clauses, let’s understand what a return-of-premium term plan is. This type of term insurance provides dual benefits: life coverage during the policy tenure and the return of all premiums paid if the policyholder survives the term. While it sounds like an ideal option, the devil often lies in the details.
1. Exclusions in Coverage
- Most return-of-premium term life policies do come with exclusions that restrict the conditions under which the policy will pay the death benefit. Some of the most common exclusions are:
- Suicide Clause: Most term life policies, such as ROP policies, will not pay out for suicide during the initial year of the policy.
- Pre-existing Conditions: Claims for a pre-existing condition developed by the policyholder contractually prior to purchasing the policy, if not disclosed, may be excluded.
- Risky Activities: Death resulting from risky activities such as skydiving or scuba diving may also be excluded.
2. Waiting Periods
Some policies have a waiting period, typically ranging from 90 days to two years, when the death benefit is not payable except for accidental death. The provision can be a harsh restriction, particularly on those immediately in need of financial protection.
3. Premium Refund Conditions
The guarantee of a premium refund always has strings attached. For instance:
- Partial Refunds: Occasionally, part of the premiums will be refunded, after deduction of taxes and fees.
- Policy Lapse: Not paying the premiums and allowing the policy to lapse can lead to forfeiting the advantage of a refund of premiums.
- Early Termination: Cancelling the policy while it is active may mean forfeiting most of the premiums.
4. High Premium Costs
While ROP term plans enjoy the advantage of returning premiums, they are more expensive than traditional term insurance. These higher premiums might render such policies unaffordable to some individuals. For instance, a 2 crore return of premium benefit term insurance can be substantially more expensive compared to a normal term plan for the same sum assured.
5. Tax Implications
Although the premiums paid under term insurance are tax-deductible under Section 80c of the Income Tax Act, there is a chance that the return amount at the time of maturity will be taxed under some conditions. It is very important to find out the tax implications to stay away from future liabilities.
6. Limited Flexibility in Modification
Certain ROP policies have limited flexibility in add-ons and riders. For example, accidental death or critical illness cover might not be provided or provided at extra cost, thereby reducing the policy's flexibility.
7. Impact of Inflation
Although the return of premium is a worthwhile benefit, it does not come with inflation cover. The sum being refunded can depreciate in real terms over time, erasing the financial gain you had hoped to receive.
8. Complicated Surrender Terms
The majority of ROP term insurance plans have stringent surrender conditions. In case, at any point, you are prepared to sacrifice the plan before maturity, you may be quoted only token sum, that too lesser than what you have contributed by way of premium.
Key Points to Remember While Selecting a Term Insurance Policy
When choosing a term insurance policy, it's necessary to:
- Compare Policies: Compare various plans, such as annual term insurance and ROP policies, to select the best-valued one.
- Evaluate Your Needs: Your financial needs, dependents' needs, and long-term engagements should be carefully considered before the coverage amount can be decided on, like purchasing a 2 crore term insurance.
- Read the Fine Print: Carefully study the policy conditions and terms of the policy, particularly the exclusions, refund of premium clauses, and the surrender terms.
- Take Professional Advice: Consult a financial advisor to better understand the tax implications and fine print.
Conclusion:
Return of Premium (ROP) term insurance is life cover with a refund of premiums, hence appealing to individuals looking for financial security. ROP plans are not immune to hidden clauses such as exclusions, waiting periods, and additional expenses affecting value. There is limited customisation, tax, and inflation that affect benefits. Though enticing, ROP plans are not for all. Your decision should be based on your requirements and objectives. With thorough research, you may choose a plan that protects your family's future and aids in your long-term financial planning.
Disclaimer: No Business Standard Journalist was involved in creation of this content
Topics : Term insurance
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First Published: May 10 2025 | 4:28 PM IST
