Pure term policy is better than return of premium

Term insurance is the purest and cheapest form of life insurance that provides higher coverage at an affordable price. If you are looking for answers to any of the following questions, then term insurance is what you need:

Am I looking to protect myself and my family?

Do I want to create financial security for my family?

Do I wish for peace of mind?

Even if I am not around, do I want to provide my family with the same standard of living?

Who will pay the liabilities when I am not around?

While there are a lot of plan options provided by term insurance products today, let us understand about pure term insurance and term insurance with return of premium.

Pure term insurance is a basic term insurance plan. It is referred to as the life option among various plans that are available with insurers. This plan offers lumpsum payout (sum assured) to the nominee on death of a policyholder.

For example:

Swapnil Mehta, a 35-year-old software developer, non-smoker, purchases a pure term insurance plan of Rs 1 crore for 20 years and pays a premium of Rs 10,526. Assume that during the 10th year of the policy, he passes away. His nominee will get the lumpsum benefit of Rs 1 crore as death benefit.

Whereas, term insurance with the return of premium (RoP) is a plan option where if the policyholder survives, all premiums are returned back at the end of the policy's term. On death, the lumpsum benefit will be paid to the nominee.

For example:

Rohan Gupta, a 35-year-old, non-smoker, purchases a term insurance with the return of premium plan option of Rs 1 crore for 20 years and pays a premium of Rs 39,036. Assume that Gupta survives till the end of the policy term. He will receive a lumpsum benefit of all the premiums paid.*

Premium costs

Pure term insurance options are cheaper as compared to the RoP option. It is evident from the above examples that pure term insurance is two to three times cheaper than the RoP option. The reason is that pure term insurance covers only mortality charges, that is, it charges only for the risk/cover it undertakes in the policy and nothing else.

If you are looking to buy life insurance, pure term insurance is a wise choice as it covers your protection needs. For investment or wealth creation needs, you can always invest in other avenues.

No interest

Another thing that should be kept in mind is that no interest is paid on the money when it is returned. Say, if the insured has paid Rs 1,00,000 in premiums over 20 years, that's what will be paid back and not a penny more.

Paid up value option

In a pure term insurance plan, if you stop paying premiums, the policy attains the 'lapsed' status.

The only advantage RoP plans have over pure term plans is that they come with a 'paid-up' option. So, if you default on premium payments or stop paying altogether, the policy continues, but with reduced benefits. While the premiums paid will be returned at maturity, the nominee will get a reduced sum assured if the insured dies. However, you should have paid premiums for at least three years to acquire the 'paid value' status.

Surrender value

If you decide to surrender a policy midway, a pure term plan doesn't return anything, whereas a ROP term plan does. It acquires a surrender value only after the first few years depending on the premium payment options, but surrender charges are high.

In such a scenario, not only do you pay more, but also pay a greater fee if you decide to quit midway. In the case of a term plan, even though you get nothing back, you have more money in hand that you can invest.

Sometimes, the simplest choices made today prove to be the best for tomorrow. Pure term insurance plan is the simplest and most basic form of life insurance that one must have in his/her portfolio. Although, it totally depends on the needs of the customer and his life stage while buying insurance, do a little bit of calculations before deciding on the same and do not just get lured by the fancy options that are available in the market.

ROP HAS LIMITED BENEFITS

• If you default premiums paid will be returned at maturity and nominee gets reduced sum assured if the insured dies, provided you have paid premiums for at least three years
   
• If you surrender a policy midway, ROP plan acquires a surrender value only after the first few years depending on the premium payment options, but surrender charges are high.

*(Premiums are calculated for HDFC Click 2 Protect 3D plus, life option and return of premium option through www.5nance.com)

The writer is AVP insurance & principal officer at 5nance.com