Term Life Insurance: Why should you not buy a return-of-premium option?
Life insurers are smart and savvy when it comes to understanding the mindset of Indians. While a majority of Indians still opt for traditional endowment-type life insurance, there is a growing section of the population which understands why purchasing plain-term lifeinsurance is the best option.
But there are some cost-conscious Indians who still can’t digest the fact that on maturity (and survival), the term plans don’t pay back anything!
To cater to such people, life insurers smartly launched the ‘Return-Of-Premium’ option for term plans. That is, this term plan has some survival benefits.
In case of the death of the policyholder during the policy tenure, both the simple term plan and the return-of-premium term plan pay the same amount. But in case of survival is where the difference lies. Simple term plan will pay nothing on maturity/survival. But the return-of-premium plan will return back all the premiums paid over the years.
This sounds attractive. Isn’t it?
It does, but there is a hidden piece of information here. Let me unhide it — the premium for Return-of-Premium (ROP) plan is higher than that of the simple term plan.
And this is exactly what makes these ROP options avoidable.
I will explain this with a real example.
Suppose a 35-year-old, male wishes to purchase a term life cover of ₹1 crore for a 30-year tenure. I checked the premiums for various options on one of the life insurance company’s websites (HDFC Life Insurance – chosen as an illustrative example and not as a recommendation). Here is what was found -
The difference in the premium for both is ₹28,778 – which is equal to almost one and a half year’s premium for the simple term plan.
And remember that both plans pay the same ₹1 crore in case of
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