Return of premium term insurance: Do TROP policies make financial sense with a higher premium?

• Return of premium terms insurance plans are a kind of term plan that pays all of your paid premiums back if you outlive your entire term policy.
  
• Since they come with a return of premium benefit, such term insurance plans charge a higher premium than a pure term plan
  
• Experts say that such plans may not be ideal for most people as the opportunity cost of extra premium amounts remains higher
  

When we hear the word term insurance, what comes to mind is a pure insurance policy which covers the policyholder for a certain term and offers benefits only in case of the demise of the policyholder during that term.

In the case of pure term insurance, the policyholder does not receive any monetary payout if he survives the policy term. However, there is a type of term insurance known as the return of premium term insurance that offers to return your premiums.

“Term return of premium (TROP) is a kind of term plan that pays all of your paid premiums back if you outlive your entire term policy. Usually, term insurance plans do not come with maturity benefits, but once you add the return of premium feature at the time of inception, the payback of premiums is counted as the maturity benefit.,” says Naval Goel, Founder and CEO of PolicyX, an insurance comparison portal.

You can choose the feature of return of premiums only at the inception of the policy and it cannot be attached or detached mid-term. Further, the maturity benefit is only paid if you have paid all of your premiums in time.

Return of premium term policies charge a higher premium

Since they come with a return of premium benefit, its a given that such term insurance plans charge a higher premium than a pure term plan.

“Due to the return of premium benefit, the premium for these term plans is usually 1.8 to 2 times the premium for pure term plan,” says Abhishek Kumar, founder and chief investment advisor at SahajMoney, a financial planning firm. In certain cases, it may be even higher.

For a better understanding, let’s compare a typical case for both policy types. Following are the premiums for a 35-year-old, non-smoker male, who has chosen coverage for 65 years of age and a life cover of 1 crore. His geographical location is Delhi and the premium payment mode is annual.


Source: PolicyX

Should you opt for it?

Return of premium term insurance plan may come with a feel-good factor as one gets back the premium at the end of the policy term. However, one needs to remember that the premium paid is a lot higher and that beats the purpose of a cheap term insurance plan which does its job of providing insurance coverage.

“As the premium is higher than pure term plans, hence return of premium term plan is not beneficial as one could get other investment opportunities during the same tenure to generate higher return on the additional premium which they would pay in case of return of premium term plan,” says Kumar.

However, people who are wary of sunk cost might go for these plans as they get the satisfaction of getting the premium back at the end of tenure in case one survives during the coverage period. Again, it may not make sense in the current financial circumstance, but for some, it may provide the comfort of assured return of the principal amount.