Pure Term Insurance or TROP – Which One Should You Choose and Why?
Unlike other countries, insurance penetration in India is low, at less than 4% of the country’s Gross Domestic Product (GDP). An important factor behind this is a lack of information. Additionally, most people are not financially savvy to understand how the benefits of insurance work.
Life insurance is an important investment component in your financial plan. It is an easy and affordable way to protect your family against financial distress in case of an unforeseen circumstance. You may choose from several types of life plans, such as term insurance, money-back plans, endowment policies, unit-linked insurance plans (ULIPs), and others. Here, we will do a comparison between term plans and term insurance with return of premium.
You may ask –what is a term insurance plan? It is an economical way to procure higher life cover. It is a pure protection plan that pays the benefits to your nominees in case of an unfortunate event during the policy term. Unlike traditional life insurance policies that pay survival benefits, regular term plans do not provide such returns if you survive the tenure.
Term insurance with return of premium (TROP)
One of the challenges for the growth of term plans was the unavailability of survival benefits. Most people look for some returns on their investments to ensure that their hard-earned money is put to the best use. To address this requirement, insurers now offer term insurance with return of premium (TROP).
When you choose this type of term insurance, the insurer repays the total premium that you pay throughout the tenure, in case of survival. TROPs are also similar to regular term plans wherein your beneficiaries receive the monetary benefits if something untoward happens to you. The only additional feature available with TROPs is the maturity benefit in the form of repayment of the entire premium.
How to calculate the premium
As TROPs repay the premium if you outlive the policy term, the cost of coverage is more than regular term plans. The total cost for the insurer increases with TROPs, which results in a higher premium.
Additionally, if you include riders like accidental death benefits, disability benefits, waiver of premium, hospital cash, and others, the premium further rises. This is true even with a regular term plan.
Your age is another factor that determines the premium for term insurance plans in India. As you grow older, the insurer’s risk increases, which results inagreater premium. When you opt for TROP, the insurer must repay the fixed premium, which also increases your cost of coverage.
Term plan versus TROP
It may seem that a TROP is a better option because when you survive the policy term, you get a refund of the total premium paid. However, here are some factors to keep in mind before you opt for either of the insurance plans.
The death benefits for both these types of plans work in the same manner. However, because insurers repay the premium at maturity, the cost for a TROP is significantly higher than a standard term plan.
- Opportunity cost
You may believe that getting something back is better than not receiving any maturity benefits. However, before you go ahead and buy a TROP, consider the difference in the premium. When you choose to invest the difference in the premium between TROP and regular term plan in other attractive investment avenues, you earn higher returns over the long-term. Moreover, you do not get any additional interest apart from the fixed monetary benefit on survival, which means the value that you receive would not even match the future inflation.
- Paid-up coverage
Several TROPs offer paid-up coverage, which means that if you discontinue paying the premium after a pre-determined period (usually three years), a reduced coverage continues for the remaining policy term. However, you will receive the financial benefit only at the end of the policy duration.
Every insurance plan has its pros and cons, and the choice depends on your personal preferences. Get your online term plan today, and protect your loved ones from a financial crunch in case of an unforeseen scenario.