Term insurance plan is a type of life insurance. You pay a premium for a sum assured under the plan. On death of the policyholder within the term, nominees get the sum assured also called death benefit. Term insurance offers no survival benefits.
The main purpose of availing life insurance is financial protection for dependents on an unexpected demise. Term life insurance is pure risk protection. Your nominees get a lump sum or staggered payouts (The payout is made by the life insurer at time intervals) depending on the type of payout chosen. Term insurance offers financial stability to dependents on the untimely death of the breadwinner.
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A plan with rising popularity among term insurance plans is the term insurance with return of premium or TROP. Term insurance with return of premium follows a very simple concept. Premiums are returned to you as a maturity benefit.
You and several other people expect cash value from life insurance plans. This is one of the main reasons behind the popularity of endowment life plans which offer a maturity benefit on surviving the term of the plan.
The term insurance with return of premium is popular just because it gives something back, unlike pure term life insurance plans. But, are term insurance plans with return of premium really good?
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You can choose the duration of term insurance plan with return of premium. You can opt for tenure of 20, 25 or even 30 years. Let’s say you have a home loan with a tenure of 20 years. You avail a term insurance plan with return of premium of duration 20 years. On an unexpected demise within the term of the plan, the dependents get the death benefit and the home loan is taken care. If you survive the term of the plan, the premium is returned. (You get 100% of the premiums paid).
As you know people avail life insurance plans like term insurance with return of premium and endowment life insurance plans, because of the cash value. Endowment life plans and term insurance plans with return of premium invest your money in fixed income securities.
Endowment plans give just 5-6% a year which is a very meager return. Term insurance with return of premium invests your money in fixed income instruments and return 100% of premiums paid at maturity. Now imagine if you had invested this money in equity mutual funds, PPF, NSC, Post Office Schemes, FD or recurring deposits. You would have got anywhere around 8-12% returns a year from these investments. Always make an investment based on the risk profile. Risk profile is basically the type of investor you are. (Conservative/ Moderate/ Aggressive).
This is where pure term insurance scores over TROP or even endowment life plans. You avail the pure term life plan for risk protection. The premiums are lower than term insurance plans with return of premium. Term insurance plans offer maximum cover at the lowest premium. This helps you save on the premiums.
See Also: Why You Need A Term Insurance Plan?
Now, some people argue that term insurance plans with return of premium give back 100% of the premiums on maturity. Yes, they do but why do you invest money. Isn’t it not for higher return? Term insurance with return of premium gives back all premiums and you lose the return on investment. You would have been better off investing this money and earning higher returns.
With pure term insurance plans, you save on the premiums. You also get an opportunity to earn higher returns by investing the difference in premium based on risk profile. Equity investments fetch 10-12% returns over the long term. PPF and FDs give around 7-8% a year which is quite high compare to the 5-6% a year you get from endowment plans.
This must be your plan: Avail pure term insurance plans for risk protection. You save on the premiums vis-à-vis TROPs and endowment life plans. You invest the difference saved in premiums based on risk profile. You enjoy risk cover and also earn high returns on the investment, much higher than term insurance with return of premium and endowment plans.
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