Life is a journey with many surprises. No one can predict the future. Hence, having life insurance is a wise decision. It serves as a shield to your loved ones when you are no more. However, when people opt for life insurance, they are often puzzled by the two options: term insurance plans and return of premium term life insurance.
On the face of it, these two options may look similar. Both offer life insurance cover. However, they function differently. This article will use very simple language to explain them to you so that you can make an informed decision for your family.
What Are Term Insurance Plans?
Term insurance plans are the most straightforward and least expensive type of life insurance. Every year, you pay a very small amount of money, which is called a premium. As a reciprocal gesture, the insurance company agrees to pay a huge sum of money to your family if you pass away within the stipulated policy period.
Assuming that you are in good health and live till the end of the policy period, the insurance plan simply expires. No money is returned to you.
Example:
- Suppose you buy a 30-year term plan
- Your annual payment is ₹10,000.
- The sum assured is ₹1 crore
In case you die during these 30 years, your family is entitled to ₹1 crore. On the other hand, if you survive the 30 years, the policy terminates, and you get nothing back.
This is the reason why term insurance is often referred to as “pure protection.”
Why Are Term Insurance Plans Popular?
Term insurance plans are quite popular because they are straightforward and cheap.
People mainly go for them due to the following reasons:
- Extremely low premium
- Large life cover
- Simple to grasp
- Good financial security for family
Young adults, working professionals, and parents usually opt for term plans, as they offer maximum protection at the minimum cost.
What Is Return of Premium Term Life Insurance?
A return of premium term life insurance plan is essentially a term insurance that has an extra feature. It basically operates like a normal term plan except for one major difference. In the event that you survive the entire policy term, the insurance company will pay you back all the premiums you have paid. This means you receive your funds back once the policy expires.
Example:
- Policy term: 30 years
- Premium: ₹18,000 per year
- Life cover: ₹1 crore
If you were to pass away, the cover would pay your family a sum of ₹1 crore. But if you survive the 30 years, then you will be getting back the total premiums you had paid (₹5.4 lakh). And because of such a process, most people see this plan as a combination of protection and savings.
The Main Difference Between the Two
Let’s contrast the traditional term insurance plans with the return of premium term life insurance in a straightforward manner.
1. Premium Amount
- Term insurance plans are characterized by cheap premiums
- Return of premium plans have higher premiums
For return of premium plans, you are required to pay more because you receive the money you paid later.
2. Money Back on Survival
- Term insurance plans: No money back
- Return of premium term life insurance: Premiums are returned
This is the most significant difference, and it is also the primary reason why people opt for return of premium plans.
3. Life Cover
- Both plans give life cover as a benefit
- The level of protection can be the same in both
The only distinction is regarding the price and the refund aspects.
4. Purpose of the Plan
- Term insurance plans only provide a focus on family protection
- Return of premium plans focus on protection as well as refund
One is solely for safety. The other also gives the feeling of getting money back.
Which One Is Better?
If you ask me, there is no one right answer. What is better depends on your mindset, budget, and goals.
Let’s simplify it.
Choose Term Insurance Plans If:
If you have these points in mind, then the term insurance plans are for you:
- You want the highest coverage at the lowest price
- Your #1 priority is the welfare of the family
- You accept that insurance is not an investment
- You are already saving or investing in some other way
- You want straightforward and simple benefits
Term insurance plans are a good fit for folks who are pragmatists and only want their families to be well taken care of in case of an unfortunate event.
Choose Return of Premium Term Life Insurance If:
Return of premium term life insurance is probably an option for you if:
- You don’t like the idea of the money just going
- You are willing to pay more for premium
- You want the mental satisfaction of being returned the money
- You like the idea of “saving” while being protected
- You are a responsible person and will never default the long-term premium payments
For those who want a combination of protection and a refund at the finishing line, this plan is suitable.
Is Return of Premium Really a Good Return?
A lot of people are under the impression that return of premium schemes are the ones that give good returns. However, it is quite crucial to be clear about one important thing.
The only money you get back is the money you spent, i.e., no extra profit.
Besides:
- Inflation devalues the money’s purchasing power over time
- The refunded sum could seem to be less after some years
Hence, return-of-premium plans are not the same as investments. They remain insurance plans where you get the chance to get a refund.
A Simple Way to Think About It
Here is a simple way to think about the two plans:
- Plans of term insurance are like the safety which you rent for your family
- Return of premium term life insurance is like renting safety and getting the rent back later
Both are for the protection of your family. One is cheap. One gives emotional comfort.
Common Mistakes People Make
People make mistakes very often while getting insurance. Here are some things you should avoid:
- Buying insurance only for the returns
- Not considering the life cover amount
- Selecting high premium plans without a need
- Commingling insurance with investment goals
Never forget this: Insurance is a safety tool, not a profit-making tool.
Conclusion
Return of premium term life insurance and term insurance plans are two different kinds of products that can be useful in different ways. The correct decision depends on your mindset towards money and security.
If the highest priority for you is the protection of your family at the lowest price, then the term insurance plans are the right choice. Return of premium term life insurance might be the solution for you if you want protection and also get emotionally satisfied by getting your premiums back at the end.
In the process of selecting, consider the following points:
- Can my family live without my income?
- What is the cover amount they actually need?
- Are the premiums affordable for me in the long run?
If properly selected, life insurance can be an efficient protective barrier for your family. The satisfaction that comes with this security is beyond any price.
