Term plan with return of premium: A TRAP to your investments

A term life insurance policy is an arrangement for  your family’s financial protection in your absence. TROP is just a trapping of your money where you end-up paying high premiums and will get back your vanilla premiums without any returns

A pure term life cover is an insurance policy that promises to pay your nominee an amount (sum assured of the policy), if you die. But there is no survival benefit as such and insured will not receive any amount once the policy term completes.

Term life cover with return of premium (TROP), is the another way of selling term life cover which gives the benefit of return of premiums paid upon survival at the end the policy term. 

 But it’s not profitable for the policyholder. Let’s understand why?

Take an example of person, age 35 is opting for SA of 1 Cr for 40 years. Annual premium break-up will be as follows (compared with premium as on date)

Now here, actually if he is opting for TROP, he will get his all paid premiums at the end of policy term (on survival) without 0% return on actual payment.

The Better WAY

Opt for term cover only and invest the difference amount in monthly SIPs.

Now see, what will be the difference assuming below rate of returns (which are quite normal when we compare past returns of equity SIPs)

So difference is quite clear, if person is opting for TROP, he will end up by getting 14.12 Lacs or 13.20 lacs (HDFC/TATA) respectively at the end of 40 years.

And if he/she opts for pure term plan and invests the difference amount only into SIPs for full tenure, the MAGIC is quite apparent.

At a nominal rate of 8% the return will be 44.95 Lacs or 39.18 Lacs respectively.

Assuming rate of 15%, the return will go up to hopping 3.19 Crore

 Be WISE

A term life insurance policy that gives you your premium back is just that. You are losing the opportunity to earn better returns elsewhere by paying a high premium.

Mixing insurance and investment is always a costly preposition. So it’s always better to separate investment from insurance and utilize the money wisely. Don’t fall for the spurious charm of ‘return of premium’ on your term policy. Maximize your life cover, buy pure term life policies and invest your savings elsewhere, say a quality mutual fund, for better returns.