How Term Insurance with Return of Premium Works?

When it comes to protecting your family's financial future, term insurance is typically the most straightforward and cost-effective solution. But what if you could receive life insurance while also receiving your money back after the policy period? This is where term insurance with return of premium (TROP) comes into play. In India, this sort of term insurance plan has grown in popularity since it provides both life insurance and premium returns. 

Key points on how term insurance with return of premium (TROP) works:

Basic term insurance foundation

Like a regular term insurance plan offers a life cover for a specific period, which could range from 10 to 40 years. During this term, the insurer promises that if the policyholder dies, the insurance company will pay the sum insured (the amount of life insurance purchased) to the nominee. This value can give financial stability to the policyholder's family, allowing them to meet crucial expenses such as children's education, debt repayments, and domestic bills while the policyholder is away.

Return of premium option

The most significant difference between TROP and a standard term plan is that, in TROP, if the policyholder survives the entire term, the insurance company will return all the premiums paid during the policy period. This feature also serves to make the policyholders realize that the money spent on an insurance policy is not wasted as they are offered back their investment (although without any interest) upon the expiry of the insurance policy.

Fixed tenure of the plan

Policyholders can select a plan tenure of their choice, depending on their requirements and the age at which they would like to have insurance. They can last from 10 to 40 years, and this provides more versatility. After the expiration of this period, if the insured is alive, the total amount paid as premium is refunded back, this gives the insured relief after the policy expires knowing that they were covered.

Premium payments

Like any other insurance policy, the TROP requires policy holders to pay a certain amount of money periodically to keep the policy active. The premiums can be paid on a monthly, quarterly, half-yearly or annual basis of the policyholder’s choice and it is imperative to keep renewing the policy to keep the life cover intact. Failing to make the agreed payments could mean that the policy is cancelled, and all the privileges are gone.

Higher premiums compared to regular-term plans

The TROP has a return of premium option, and this makes it costlier than a traditional term insurance plan. In a basic term insurance policy, if the policyholder is alive at the end of the term, the insurance company does not repay any of the premiums. However, in TROP the company makes a guarantee that it will refund the amount of the premium in case of no claims, and this makes the premium amounts to be relatively higher.

No interest on returned premiums

While TROP returns the premiums paid by the policyholder at the end of the policy term, it’s important to note that the returned premiums do not include any interest or growth. This means you will receive exactly the amount you paid over the policy period, without any additional financial gain.

Tax benefits

TROP offers significant tax savings under Indian tax regulations. Premiums paid for the coverage are eligible for tax deductions under Section 80C of the Income Tax Act, up to a ceiling of Rs. 1.5 lakh. Furthermore, the lump sum amount received after the policy term (returned premiums) is tax-free under Section 10(10D), therefore the policyholder is not required to pay taxes on the returned premiums.

Maturity benefits

If the policyholder is alive at the end of the policy term, then he is paid a maturity benefit, which can be summed up as the sum of all premiums paid over the term. This lump sum amount serves as a financial buffer and can be considered as a form of saving as well as ensuring the individual is protected for the entire term

Flexible riders for additional benefits

Policyholders can aggravate their basic insurance by including riders in the base TROP plan. Examples of riders are accident, death, illness, and disability benefits. These riders assist in providing extra cash back in situations such as accidents or acute health complications of the insured, thus making it more comprehensive.

Death benefits

Similar to any term insurance plan, if the policyholder dies during the policy period, the insurer pays the sum assured to the nominee. It assures the family it has the necessary capital it may require in the future to meet its needs. In TROP, if a claim is made in the event, the premium return benefit is withdrawn and only the sum assured is given.

Guaranteed return

The beauty of TROP is that your money is not gone, unlike in conventional term insurance. If you survive the policy term, all the premiums paid are refunded in full. It serves as a form of assurance that your money will be back, which gives a certain level of satisfaction that the amount you paid for the policy will be refunded in case no claim is made through the term.

No surrender value before completion

One key point to note is that TROP generally does not provide any surrender value if you decide to stop the policy before completing the full term. If the policyholder discontinues payments or terminates the policy early, they will not receive any premiums back, which makes it essential to keep the policy active until maturity.

Who should buy TROP?

TROP is perfect for people who desire life insurance but are concerned about losing their premium payments under a typical term insurance plan. It is ideal for those who like a balance of risk and reward—life insurance for protection and premium returns for savings. This makes TROP an excellent solution for people who seek the protection of insurance while also receiving some type of maturity reward if they survive the term.

Ending note

Term Insurance with Return of Premium (TROP) is an excellent solution for those seeking life cover and a refund of premiums if they survive the policy tenure. It provides the best of both worlds: security for your loved ones in the event of your untimely death and financial compensation if you outlast the policy. While the premiums are greater than those for normal term insurance, many people value the peace of mind that comes with knowing their money will be returned to them. When the tax benefits and extra riders for greater coverage are considered, TROP becomes a balanced alternative for the financially prudent individual. 

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