Most policyholders prefer term insurance plans as the policy is simple and offers pure life cover at a low-cost premium. But term plans also have types of which return of premium is one. So, let’s look at what return of premium insurance plan is and the pros and cons of it.
What Is Return of Premium (ROP)?
Return of Premium is a feature in term insurance policies that refund the premiums paid for the entire policy period if you survive the term. When you compare this type of term plan with a basic term insurance policy, you do not get any maturity benefit if you live even after the policy expires. ROP is beneficial for retirement purposes as you get a lump sum refund which is tax-free at the same time. Now, that you are aware of the Return of Premium aspect, let’s look at the pros and cons of such a plan:
Pros of Return of Premium Term Insurance
● Refund of Premiums
All the premiums paid throughout the policy term are refunded to you if you survive the policy period. It’s a lucrative option for those policyholders who think of a term plan as ‘What if I survive the term? The corpus invested in the insurance will go in vain, and hence, a different investment option would have been better’. The refund also aids in planning your retirement or can be utilized for another purpose.
● Guaranteed Return
The return of premium is certain and will be refunded to you after the plan matures. No amount is deducted and the entire lump sum is handed back to you.
● Tax Benefits
The corpus received on maturity is entirely tax-free and you can claim it for tax deductions. Also, the premiums paid towards securing a life insurance plan can be claimed under Section 80C with a maximum cap of INR 1,50,000 per financial year.
Cons of Return of Premium Term Insurance
● Expensive Premiums
If you opt for a return of premium term insurance plan, the premiums charged will be higher when compared to a normal term policy. Thus, you will have to increase your budget for buying a pure life cover instead of investing the money in better tax-saving tools.
● No Interest Earned
When you invest in ROP plan, you do not get the interest earned on your premiums but only get a refund of the money invested. If you compare this with other insurance plans, you can get handsome returns instead of going for a return of premium. In the long run, you really are just getting your money back without any profits.
● Better Investment Options
Instead of investing in return of premium term insurance, many policyholders find it convenient to invest the difference amount in financial instruments that will give greater returns. You can also find options that promise fixed returns and give lucrative benefits.
If the return of premium life insurance plan suits your requirements, you can go for it instead of a term plan. But if you don’t find the returns to be beneficial, you can opt for insurance policies that give maturity benefits and regular payouts like money-back policy and whole life plan amongst others.