Why Term Plan with Return of Premium Makes Sense?

In short:

  1. Refund of Premium: A term plan with return of premium (TROP) refunds all premiums paid if the policyholder survives the term, ensuring no investment loss.
  2. Flexible Coverage: TROP allows for adjustments in coverage based on life stages like marriage or childbirth, ensuring adequate financial protection for changing needs.
  3. Tax Benefits: TROP offers tax-saving benefits under Section 80C of the Income Tax Act, making it a financially advantageous investment option.

Marriage, children’s schooling, your family’s future demands, your health difficulties, and retirement are all unexpected events in life, and having an insurance policy protects you from the uncertainties of life by ensuring that you are financially prepared to meet these bills. Insurance is an excellent risk management instrument for planning these certainties.

A term plan is the simplest and most common type of insurance, protecting for a particular period or “term.” If the policyholder dies within the term, their beneficiaries receive a predetermined amount called the “sum insured,” which is the amount for which the insurance was purchased. Given the rise in life expectancy due to improved and healthier lives, most people expect to outlive their policy term. They are hesitant to pay for anything that may not ultimately benefit them or their family. “Why pay an annual fee for an insurance coverage that may never pay you back?” is frequently asked. This is where a term plan with a return of premium (TROP) comes in. It is suitable for those individuals who expect their term plan to provide them with monetary benefits if they outlast their policy.

What is it, and how does it work?

A term plan with a return of premium, abbreviated as TROP, is a type of term insurance that meets the needs of those seeking maturity benefits in their plans. As with any other term insurance plan, it provides financial protection to the family in case of an event where the policyholder dies.

On the other hand, a term plan with a return of premium or TROP varies from a regular term plan in that it provides the insured with a premium return as a survival benefit if they survive the policy’s term.

Consider a with a yearly premium of ₹2000 and a ten-year coverage. If the insured dies, their family will receive an amount of ₹1 crore. If the insured lives the insurance period, the insurer will return the total premium amount paid, which is ₹20,000 (2000 x 10).

Why should you invest in a term plan with a return of premium?

Refund of Premium Upon Surviving the Policy Term: As the name implies, the term plan with return of premium differs from a standard in that it provides the annualized premium paid throughout the policy period. As a result, if you die before the policy expires, your family will get the whole sum assured under the insurance plan. If nothing happens to you and you live to the end of the term insurance period, you will get the amount of premium you paid under the plan. In other words, you can receive both coverage and survival benefits through the plan.

One can increase the sum assured based on the Life Stage:

Your requirements and aim to evolve throughout your life. As a result, you require a life insurance policy that adapts to your changing circumstances and needs. This is where a term insurance plan with a return of premium benefit, offered for an extra premium, comes into play. The plan allows you to improve your in the future if essential life events such as marriage or the birth of a child happen (for an additional price). When purchasing your insurance, you can select whether or not to improve your coverage later in life. As a result, you may be confident that your term insurance coverage is comprehensive enough to support your family throughout critical stages in their life.

Benefits Under the MWPA:

According to Section 6 of the Married Women’s Property Act (or MWPA), 1874, if a married individual purchases the term plan with a return of premium for himself and endorses it under the MWPA (naming his spouse and children as beneficiaries), no other person (such as the insured person’s parents, friends, or relatives) has any right to the term insurance plan benefits. Furthermore, the insured will not claim the term policy benefits if they survive the plan’s term. Instead, by endorsing your term life insurance policy under MWPA, you can provide your wife and children with the insurance cover payout (in the event of your untimely death) and the survival benefits (a return of premiums if you survive the policy term).

Paid-up option for non-earning investors:

A term plan with a return of a premium plan provides a ‘paid-up option’ for people without a consistent source of income. This benefit helps the policyholder when they are unable to pay the payment. Even if the policyholder fails to pay their premiums, the plan will continue, although with reduced coverage. However, most insurance firms require the policyholder to pay the premium for several years before providing this benefit.

Tax Benefits:

In addition to providing financial stability for an individual’s family, the term insurance plan offers tax-saving benefits under Section 80C of the Income Tax Act. Premiums of up to Rs 1.50 lakhs are subject to tax advantages under Section 80C. Section 10(10)D allows for tax benefits on death benefit payments to the nominee. These tax breaks are subject to existing tax regulations. Tax rules are subject to change.

Finally, Make the Most of Life with a Term Plan with ROP Benefits

Most of us look for opportunities to provide a significant return on investment (ROI). There is nothing wrong with doing so because we want to get the most out of our savings while also building wealth. As investors, we must recognize that investment returns should not be the sole criterion for selecting a specific investing tool. Instead, look for plans that offer comprehensive benefits, such as insurance coverage. Consider a life insurance policy that includes ROP benefits, which may protect your loved ones financially against unforeseen events and offer financial aid to your family in your absence.

FAQs

What is a term plan with a return of premium (TROP)?

Answer: TROP is a type of term insurance that provides a refund of all premiums paid if the policyholder survives the term, ensuring no loss of investment.

How does TROP differ from a regular-term insurance plan?

Answer: TROP differs from a regular term insurance plan by providing a refund of premiums paid if the policyholder survives the term, while regular term plans do not offer such refunds.

What happens if the policyholder survives the term of a TROP policy?

Answer: If the policyholder survives the term of a TROP policy, they receive a refund of all premiums paid over the policy term, ensuring no loss of investment.

Can the sum assured be increased under TROP?

Answer: Yes, the sum assured can typically be increased under TROP to accommodate changing life stages such as marriage or childbirth, providing flexible coverage options.

What are the benefits of endorsing TROP under the Married Women’s Property Act (MWPA)?

Answer: By endorsing TROP under MWPA, the policyholder can ensure that the insurance benefits go directly to their spouse and children, providing financial security to the family in case of untimely death, while also receiving a refund of premiums if the policyholder survives the term.

Is there an option for non-earning investors in TROP?

Answer: Yes, TROP typically provides a ‘paid-up option’ for non-earning investors, allowing the policy to continue with reduced coverage even if premiums cannot be paid after a certain period.

What tax benefits are associated with TROP?

Answer: TROP offers tax-saving benefits under Section 80C of the Income Tax Act, allowing for deductions on premiums paid, and under Section 10(10)D, providing tax benefits on death benefit payments to the nominee.

Why consider a TROP policy for financial planning?

Answer: TROP provides a comprehensive solution for financial planning by offering insurance coverage, refund of premiums upon survival, flexibility in coverage, tax benefits, and options for non-earning investors, ensuring financial security for the policyholder and their family.