Return of premium on term insurance plans: Should you get one?

Traditional life insurance policies are something which many of us may still be having and paying good amounts of premium for the same. But lately due to the practical approach, many people are moving out of their traditional life insurance policies like money-back plans, endowment plans, etc. and taking up pure term policies. The reason for which people used to buy traditional plans is that they get something back either at maturity or periodically depending upon the policy opted for. Now even some of the term plans are offering a return of the premiums paid at the end of the term. This may lure many to opt for such plans as the premiums that are paid are already cheaper than traditional policies and on top of that you are getting it back on maturity sounds like music to ears. So, would it be a wise decision to opt for such a policy? Let’s check out.

First and foremost, there would be a premium differential between a pure term policy and term policy with return of premiums paid on maturity. If we look at premium for a 30-year non-smoker requiring sum assured of Rs. 1 crore with a term of 30 years then in case of pure term plan the premium works out to be Rs. 10,000 annually, whereas in case of term plan with return of premium it works out to be Rs. 19,100. This means that pure term plan is 91 per cent cheaper than term plan with return of premium option.

Now let us look at it from a benefit point of view. In terms of benefit, term plan with return of premium option would be paying out all the premiums paid by you at the end of the terms, whereas pure term plan has no such benefit apart from the death benefit that the nominee would receive post the death of insured. However, the pure term plan being cheaper than term plan with return of premium option, you can invest that extra Rs. 9,100 in mutual funds. Assuming you invest it in a liquid fund with an expected rate of return being 7 per cent, at the end of the term, you would have accumulated Rs. 9.2 lakhs. But by opting for a term plan with return of premium policy at the end of 30 years you would get Rs. 5.73 lakhs. So, as we can see opting for a pure term plan and investing remaining in mutual funds is a better strategy than opting for a term plan with return of premium option.