What is term insurance?
Term insurance is the purest form of life insurance. It is essentially a type of a life insurance policy that provides the nominees or beneficiaries a death benefit in the event of the policyholder’s demise. In exchange for the life insurance cover, the policyholder is required to make regular payments known as "premiums" to the insurance company.
Unlike other types of life insurance plans, the pay-out in a term insurance is only made in the case of the policyholder’s death during the policy term and not upon the term policy’s maturity if the holder survives the tenure. It is primarily for this reason that the premiums charged for term insurance is always lower than the other types of life insurance.
However, now you can also buy term insurance plans that provide a return of premium on maturity, which means you will receive the money you have paid in your term insurance policy if you live the term of the policy.
What is the money back policy?
Now that you have the answer to the question "What is term insurance?" let us take a quick look at what the return of premium/money back feature is.
As you have already seen above, a term insurance is a life insurance policy. Since the policyholder is not liable to receive any maturity benefits if he survives until the end of the policy term, the premiums that he pays during the tenure of the policy is essentially forfeited and is not returned to him (excluding taxes on premiums). However if there is a sudden demise of the policyholder during the policy term, the nominee stands to receive the term insurance benefits.
On the other hand, there is a variation of a term policy where the insurance company returns the premiums paid throughout the tenure of the policy back to the policyholder. This is known as a term insurance plan with return of premium. These premiums (excluding taxes), which is paid throughout the tenure, is returned if the policyholder survives until the end of the policy term.
In the event of his death during the policy tenure, the beneficiaries of the policyholder would be eligible for a death benefit in accordance with the conditions of the term policy. Such a policy is also known as term insurance with money back or a term return of premium (TROP) plan.
How does term insurance with a return of premium work?
Here is a brief look at how term insurance with return of premium works -
Let us assume that Mr. Rakesh is in the market for a term policy. He purchases a term insurance with the money back option, which provides a life insurance cover of around Rs. 50 lakhs. The total tenure of the term policy is 20 years. In exchange for the life cover, he is required to pay an amount of Rs. 10,000 per annum (exclusive of the taxes) for the entire term of 20 years. In this case, one of two things are likely to happen. Let us visit each scenario one after the other -
Scenario 1: Mr. Rakesh dies during the policy term
In this scenario, the nominees or the beneficiaries of Mr. Rakesh would receive the sum of Rs. 50 lakhs as a death benefit from the insurance company.
Scenario 2: Mr. Rakesh survives until the end of the policy term
In such a situation, Mr. Rakesh would get back the premium that he paid throughout the entire tenure of the policy, which comes up to Rs. 2,00,000 (Rs. 10,000 x 20 years).
Benefits of TROP
Term insurance with money back option comes with a whole host of benefits to the policyholder. Here is a quick glimpse of some of the advantages –
1. Guaranteed return of premiums
With regular term insurance plans, the policyholder does not receive any maturity benefits. However, with TROP plans, they get to enjoy a maturity benefit by way of getting their premiums back.
2. Tax benefits
The premium that the policyholder gets back at the end of a TROP plan is completely exempted from taxation under section 10(10D) of the Income Tax Act, 1961, subject to the provisions stated therein. This is in addition to the tax deduction of Rs. 1,50,000 that he gets to enjoy on the premiums paid towards the term policy according to section 80C of the Income Tax Act, 1961.
3. Surrender value
In the event where the policyholder surrenders a TROP plan, he is liable to get back a portion of the premiums paid by him if the policy has acquired any surrender value at the time of surrender, subject to policy terms and conditions.
A term insurance with a money back option is a good option for individuals, since it provides a lot of value to the policyholder. With TROP plans, the policyholder gets to enjoy a guaranteed return of the premiums that he paid. This reduces the financial burden significantly, which in turn gives the holder some much-needed peace of mind.
If you opt for a term plan with a return of premium option, make sure you pay your premiums regularly. That way, you will continue to enjoy the life cover, and in case you survive the policy term, all the premiums you paid will be returned, so you can count on that lump sum inflow of funds at the end of the tenure.