Picture purchasing a helmet for a bike ride. You wear it for safety. If you return home safe, you probably don’t regret that the helmet didn’t really “do” anything. Your only thought is feeling safe! Term insurance is exactly like that helmet.
It is a very basic contract. You give a little bit of money (called a premium) to the insurance company yearly. In return, if you die, the company gives a large sum of money to your family. It safeguards your family’s financial future.
However, people in India love getting their money back. We keep asking, “What if I survive the policy?” Will my money be refunded?”
To solve this, companies launched term insurance with return of premium. We will explain how this operates, take a look at the major tax benefits of term insurance, and determine if it is really a good investment of your money.
Major Advantage: Tax Benefits of Term Insurance
When you purchase term insurance, the government encourages you to be prudent. They offer you very good tax incentives under the Income Tax Act. Here is how you can reduce your tax liability:
1. Save Your Money Today (Section 80C)
The amount you spend on your term insurance every year can be counted as a deduction from your gross income for tax purposes. You can reduce your taxable income by a maximum of ₹1.5 lakh per year through Section 80C. This means you are paying less income tax simply by securing your family.
2. Tax-Free Compensation to Your Family (Section 10(10D))
If God forbid, something were to happen to you, the large life insurance amount would be handed over to your family. The icing on the cake? Your family is not required to pay a single rupee of tax on this money. It is fully tax-free as per Section 10(10D).
3. Additional Savings on Health Riders (Section 80D)
A big bonus of making your plan more comprehensive with features like adding a cover for critical illnesses or serious diseases is that the premium spent on this portion gives you further tax benefits under Section 80D.
What is a Term Insurance with Return of Premium?
Usually a term plan is straightforward. If you are alive at the end of the policy term (say 30 years), the policy terminates and you don’t get anything back. It’s a case of pure protection.
Term insurance with return of premium (commonly abbreviated as TROP) is indeed a little different. When you survive the term of the policy, the insurer returns to you the entire amount of premiums paid over the years.
Great, isn’t it? That’s like getting insurance for free. But we should examine it more closely and understand the real numbers behind it.
Is Return of Premium Worth It? Let’s Compare
In order to find out if it is a good investment for you, let us see how each option manages your money. If you opt for a typical term insurance, you get a very high life cover, for instance, ₹1 Crore, at an extremely affordable yearly rate. As an example, it might cost you just ₹10,000 per annum. The downside is that if you live through the term, you don’t receive any money back at the end of it. Nevertheless, you will still be entitled to enjoy all the normal tax benefits under Section 80C as long as the policy is in force.
On the other hand, opting for term insurance with return of premium means you get the same ₹1 Crore of life cover, but your annual expense will increase drastically. It will easily require you to pay double the amount, i.e., ₹20,000 per year. The alluring part of this plan is the maturity benefit: if you live till the end, the company will give you back the entire amount you paid as premiums. Also, you continue to receive the same tax benefits under Section 80C.
Clearly, the insurer is not providing you with “free” insurance. They are taking from you extra money, investing that extra money for 30 years, and then handing it back to you without any interest added.
The Hidden Cost: Inflation
In India, the prices of goods and services increase every year. This phenomenon is called inflation. Imagine: How much could you buy with ₹100 thirty years ago? Very much! And what can you buy today with ₹100? Perhaps a couple of snacks.
If a company gives you back only your basic premium after 30 years, that amount will have lost a significant fraction of its value. Receiving ₹3 lakh after a long time will seem like a very small amount because prices will have risen a lot by then.
A Smarter Choice: The “Buy Term, Invest the Rest” Strategy
Do not waste your money on a return of premium plan. Hint: here’s a smarter trick!
- Buy a regular, low-cost term insurance plan.
- Take the extra money you saved (the difference in cost) and invest it yourself.
You can put that extra money into a Public Provident Fund (PPF), a Sukanya Samriddhi Account for your daughter, or simple mutual funds. Over 25 or 30 years, the money will grow significantly because of compound interest. It will likely grow into a much bigger sum than what the insurance company would ever return to you!
Final Verdict: Which One Should You Pick?
- Go for a Continuing Term Plan if: You desire the maximum life coverage at the minimum price. Ideal for young professionals, parents, and budget-conscious persons. It offers the best term insurance tax benefits without an unnecessary drain on your cash.
- Pick up Term Insurance with Return of Premium if: You basically do not want to be left with nothing after the term is over. If you know that you will just use the extra money for things like clothes or gadgets and will not invest it, then TROP serves as a savings plan that is forced upon you.
Insurance is for peace of mind and not to be the source of profits. Discuss it with your family, view your monthly budget, and get the kind of plan you will be comfortable with at night!
