Return of premium term plans: Is it worth the premium paid?

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Term plans offer protection by giving a lump sum amount to the family in case the insured dies during the term of the policy. There are, however, two types of policies to choose from- one gives you only protection cover while the other offers both protection and return of premium at maturity. What will you opt for? Without going into details, the second option looks like a lucrative deal as it gives your premium back. But if you go deeper you will realise that pure term plans score over return of premium (ROP) term plans on many counters.

Here the focus is entirely on offering protection to the family of the insured. Here is a lowdown to help you understand why pure term plans are better than ROP term plans:

High premium

Pure term plans simply offer life cover and, therefore, they are much cheaper. These plans do not combine insurance and investment like endowment and unit-linked plans. Consider this: A term policy with a cover of Rs 1 crore for 30 years will cost a 30-year-old Rs 9,276 a year. However, a return of the premium plan from the same insurer will cost Rs 18,396. The difference each year works out to almost 100% at Rs 9120.

Reasons for such a sharp difference in premium rates are many. In a regular term plan, the customer pays only for the mortality risk. In ROP plans a customer pays not just for the mortality cover but also for a guaranteed return of all the premiums. This accounts for the difference in premium rates.

Low return

If you invest the difference of Rs 9,120 per annum for the next 30 years in PPF which offers a guaranteed return of 7.1% the amount will come to Rs 8.77 lakh at the end of 30 years. However, you would receive only a premium paid of around Rs2.73 lakh if you opt for the ROP plan. The wide difference in maturity clearly tells where to invest in. The guaranteed return of premium is not worth going for.

Money 9 suggest you pure term plans as they are much cheaper compared to other options. Moreover, go for online plans as they are cheaper compared to offline plans.