The illusion of return of premiums in Term plans!

 Should I opt for Return of Premiums in a pure term plan? 

Simple Answer - “NO”

Detailed Answer: A pure term plan doesn’t provide any return if one survives the end of the policy term. So many of us think it is a waste of money & hence prefer at least the total premiums paid to be refunded back (ROP – return of premiums option).

We will look at the reasons with an example of 40-year-old purchasing a 1 crore term policy for 25 years term & pays the premium for just 10 years only.

1) Premiums are too costly, if we opt for ROP

# Premium for pure term plan: 43,100/- for 10 yrs.

# Premium with ROP option: 62,400/- for 10 yrs.

# Premium Difference: 19,300/- more p.a. for 10 yrs.

2) You don’t get the GST paid back which is included in the premium payable.

3) Value of money received at the end of the term is too low.

# Return of premiums after 25 years: 6.10 lakhs

# Value of 6.10 lakhs @ 6% after 25 years: 1.40 lakhs.

But we would argue that at least we get something, even though the value is less.

4) You will get more if you invest the difference in premiums (19,300/-) between the 2 options as a SIP in Mutual Fund (or) even keep it in a bank.

# Term plan with Return of premium: 6.10 lakhs

·       # Invest the difference in Mutual Funds: 13.88 lakhs @ 10% assumed rate.

·       # Invest the difference in Mutual Funds: 9.40 lakhs @ 8% assumed rate.

5) If you are prepared to pay this much premium for ROP, then it would be better to opt for higher insurance coverage, so that the family is better secured.

For the same premium of 62,000/- p.a., you will get 1.60 CRORE coverage, an increase of 60%!

Conclusion: If you want to give the insurance company / us more business, opt for ROP. If you want better returns / cover. opt for a pure term plan & invest the rest!