For fulfilling one’s life cover requirement, buying a pure term insurance plan through the online mode is the best choice
Taking a term Insurance policy to secure your family’s future sounds like a step in the right direction, doesn’t it? TROP or Term Return of Premium is a term plan that pays if the insured dies; however, it returns the entire premium if the policyholder happens to survive the term of the policy. But, is TROP really a trap or is it beneficial?
Return expectations from risk cover
When people invest, they always weigh the returns and benefits against the amount invested by them. There are some products such as term insurance whose returns become visible only after the death of the insured. But, the lack of any returns on surviving the policy term makes many put off the buying decision, especially the self-employed.
The phrase “FREE Life Cover” has been widely used to lure people into buying a term return of premium plan. Everyone wants more from the investments he/she makes. This tendency has led to the introduction of TROP Plans in the Indian Insurance Market. These plans are similar to basic term insurance plans; however, TROP plans provide life cover to the life insured, wherein on the death of the life insured, the death benefit, i.e., the sum assured, is paid. If there’s no death, and the policy term gets over, then basic premiums are paid.
Some insurers have taken it a step forward by providing additional benefits like Critical Illness, Accidental Death Benefit, Total Permanent Disability Benefit and other features that are built into the plan. At the same time, insurers have also extended limited premium payment facilities for these plans.
Many self-employed people have taken a great liking to this plan, as it provides the policyholder with a life cover, and even returns the premiums paid on surviving the policy term. Effectively, TROP Plans aim at creating a win-win situation for the policyholder. While on one hand, after the death of the life insured, the sum assured is paid to the nominee, to maintain their family’s lifestyle or fulfil life goals in the absence of the breadwinner, on the other, if the life insured survives the policy term, all the basic premiums paid under the plan are returned as maturity benefit.
In spite of such benefits, the exorbitant premium charged under these plans goes against the very principle of a term insurance plan. A term insurance plan is well-known for providing a high sum assured at a very reasonable price. A 30-year-old, healthy, non-smoker male can get a life cover of Rs 1 Crore for a premium ranging around Rs 10,000 p.a. for a policy term of 40 years. If this plan is taken through the online mode, the premium will come down even further. On the other hand, a TROP Plan for the same person with the same sum assured and other parameters, would cost anywhere around Rs 28,000 p.a. or even more. In short, a person would be spending around Rs 18,000 more than a regular term insurance plan and that too every year for 40 years.
As per the above calculations, a person would be spending Rs 4 Lakh for a 40-year cover under a pure term insurance plan. For a TROP Plan, the same individual would have spent Rs 11.20 Lakh, i.e., Rs. 7.2 Lakh more over 40 years.
Now, if the same amount of Rs 18,000 were invested in a mutual fund scheme that gives inflation-adjusted returns at 10 per cent, then at the end of the 40th policy year, the policyholder would receive around Rs 30 Lakh, which is way more than the Rs 11.20 lakh paid back under a TROP Plan.
Should you buy?
We can easily conclude from the above calculations that there are no free lunches in this world. A wise investment decision is to always keep insurance and investment separate from each other. For fulfilling one’s life cover requirement, buying a pure term insurance plan through the online mode is the best choice. Through the online channel, you can compare various plans available from different insurers and buy the most ideal cover. Then, you can invest the balance amount available in a good mutual fund or any other suitable investment scheme where the returns would be more than the amount paid as premiums for the pure term plan.(The writer is Chief Business Officer, Coverfox.com )
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