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Moneylife » Personal Finance » Insurance » Term plan with return of premium: Should you go for it?

Term plan with return of premium: Should you go for it?

Raj Pradhan | 12/11/2012 12:38 PM | 

Pure term plan does not give anything on maturity, while “return of premium” term plan gives you back all the premiums paid. If you want the feature, you will have to pay a price for it. Find out your options

Aegon Religare and Shriram Life Insurance have launched “return of premium” (RoP) term plans called Save Guard and New Money Back Term Plan, respectively. The product designed to provide life cover while returning all the premiums to the policyholder at the completion of the policy term. The plans offers a lump sum payment of sum assured (SA) to the nominee/beneficiary on the unfortunate death of the life assured during the policy term.
 

In a normal term plan you get back nothing. Return of premium term plan gives a feeling of comfort—one is getting back all the money paid to the insurance company for the term plan. But you yourself will have to pay for that comfort. The premium for RoP term plan is much higher than what you will pay for a pure term plan. The premium for RoP term plan is used partly for risk cover and the remaining for investment. The part of the premium that is invested is able to give the returns for the RoP feature to work. So, it works like a traditional life insurance product and hence, not in the best interest of the saver. There is a vast price difference between a term plan with RoP and a pure term plan. The premium for a term plan with RoP can be Rs3,000 for SA of Rs2 lakh while a pure term plan for SA of Rs2 lakh will cost less than Rs400.
 

Insurance company

Product name

Premium

Aviva Life

Shield Advantage

Rs4,427

MetLife

Met Suraksha TROP

Rs5,382

IDBI Federal

Level cover with ROP

Rs5,673

ING Life

Term Life Plus

Rs6,535

Reliance Life

Special Term Plan

Rs7,630

Birla Sun Life

Premium Back Term Plan

Rs8,254

AEGON Religare

Save Guard (new product)

Rs8,390

Bajaj Allianz

Term Care

Rs9,352

ICICI Pru

Life Guard with RoP

Rs9,854

Shriram Life

New Money Back Term Plan (new product)

Rs12,600

 

Policybazaar and Moneylife research—Price for term plan with return of premium for Rs10 lakh sum assured; age 27 years; non-smoker; male; policy term of 20 years
 

According to Deepak Yohannan, chief executive officer, Myinsuranceclub, “Term plan with RoP is an old game. These are from an era when pure online term plans were not available. Today, customers see a huge difference in pure online term plan versus term plan with RoP and think twice before buying RoP. It is sold by agents as ticket size is high for getting decent commission.”
 

Just like the premium of an offline term plan is two-three times the premium of online term plans, the term plan with return of premium varies two-three times between the low and high end, even though they are all offline term plans. In the comparison given, the lowest premium was from Aviva Life Shield Advantage of Rs4,427.
 

New product AEGON Religare Save Guard has a premium of Rs8,390, which is on the higher side. Shriram Life New Money Back Term Plan has a premium of Rs12,600, which is the highest when compared to other product offerings.
 

According to Akshay Mehrotra, chief marketing officer, Policybazaar, “Out of the total sales for term plans, only 8% to 9% are for RoP term plan. It is more popular with Tier-2 and Tier-3 cities rather than metros. It is for people who want something back at the end of the term. RoP pricing is higher due to distribution costs and some products with high premium are older products without price revision.”
 

What if you had purchased pure term plan and invested the saved premium to get 8% p.a. returns? Will it be better than going with lowest premium RoP term plan?

 

Insurance company product

Premium

Corpus at end of policy term of 20 years

Aviva Life Shield Advantage (RoP term plan)

Rs4,427

Rs88,540

IndiaFirst (online term plan without RoP)

Rs1,563

Rs1,41,413 assuming that the premium difference of Rs2,864 (4,427 minus 1,563) is invested @8% p.a. 

LIC (offline term plan without RoP)

Rs3,356

Rs52,931 assuming that the premium difference of Rs1,071 (4,427 minus 3,356) is invested @8%p.a.

 

Premium for Rs10 lakh sum assured; age 27 years; non-smoker; male; policy term of 20 years
 

Going for an online term plan without RoP will definitely be an advantage over buying the cheapest term plan with RoP. In the example we considered, Aviva Life Shield Advantage offers RoP at the lowest premium. The higher premium term plan with RoP put the consumer at even more disadvantage as the premium can be 2-3 times the lowest premium option. Go for a pure term plan and invest the saved money in PPF, FD, mutual funds, etc. Term plan with RoP will not be a cost-effective option.
 

Please click here to know about Online Term Plans.

 


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4 Comments
Sachin

Sachin 1 year ago

Just keep it simple. All this ROP and fancy stuff is out to fool the consumers. Term plan is for protection and nothing less.

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Ramesh Poapt

Ramesh Poapt 2 years ago

LIC's Bimar Kiran and B K-I were good plans combining Term Insu and Return of premium. The same is discontinued I believe...if there is any such existing LIC product,anyone- kindly inform...

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raj

raj 2 years ago in reply to Ramesh Poapt

Today, LIC does not have term plan with return of premium.

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pravsemilo

pravsemilo 2 years ago

In your last article about the Aegon product, you wrote that Aegon Religare is a JV between Aegon, Religare & Bennet, Coleman & Co. It was an interesting revelation. No wonder Aegon's online term plan gets a 5 star rating in ET Wealth whereas LIC's term plan get a meager 3 star rating.

Also since this Monday ET Wealth no longer publishes the same comparison of term insurance products.

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