Return of Premium Term Insurance – Why it is not worth it

If you are looking for a term insurance plan, it is very likely you will bump across a variant “Return of Premium” (RoP).  It is sometimes also called “Term Return of Premium” (TRoP) or Term Insurance with Maturity Benefit, or sometimes Premium Back Term Plan.  Return of Premium Term Insurance is nothing but a term insurance plan but unlike pure term insurance, in this variant if you don’t die during the entire term of the policy, then you get all your premiums back.  But is it really as good as it sounds or is it a deceptive deal?  Let’s find out.
 
There is a simple way to find out if Return of Premium Term Insurance is worth it.
 
 

 
Let’s take an example of a 32 year old non-smoker male who is looking for a life insurance cover of Rs. 50 lakhs for 25 years.  And let’s compare two real options available in the market as of today.
 
Option 1 : A Return of Premium Term Insurance Plan
 
Option 2 : A pure Term Insurance plan for the same cover + any other investment for the balance amount.
 
Refer to the table below before we begin to analyze the Options.
 
Click on the table below to view it full screen.
 

We have used the premiums from a reputed Life Insurance company to do the comparison.  The premiums are taken from the company’s website and is based on published mortality tables.
 
Option 1 :
 

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For a 32 year old non-smoker male with a life insurance cover of Rs. 50 lakhs for 25 years, the Return of Premium Term Insurance premium works out to be Rs. 45,700 per annum.  For 25 years, a total premium of Rs. 45,700 x 25 = Rs. 11,42,500 is paid.
 
In case death occurs, the nominee gets Rs. 50 lakhs.
 
In case of survival, i.e. death does not occur after 25 years, the total amount of Rs. 11,42,500 (net of taxes, stamp duties, etc.) are returned.  The rate of return is 0% since no additional amount comes back to you.
 
Option 2 :
 

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The pure term insurance premium for Rs. 50 lakhs is just Rs. 6,200 per annum.  This needs to be paid for 25 years.
 
Since we want to do a like-to-like comparison, assume that the balance amount i.e. Rs. 45,700 – Rs. 6,200 = Rs. 39,500 is invested into any financial instrument of your choice, say Fixed Deposit, PPF, Mutual Fund or anything else that you are comfortable with.  And let us assume a nominal 7% return from that amount over time.
 
In case death happens, the nominee gets Rs. 50 lakhs + the value of the investment at the time of death.
 
In case of survival, the nominee does not get anything from the pure term insurance policy, but at the rate of 7% the nominee gets Rs. 30,92,815!
 
The verdict is clear – in case of both Death or Survival, Option 2 is far better!
 
You may then wonder why Return of Premium Term Insurance is then even sold – well, there are some people who ‘feel it is better’ because they are getting a ‘free life insurance’.  You have seen the numbers, it is not free at all.  In fact, they tend to lose out a huge amount of money since they don’t make use of the opportunity to make their money earn them even a nominal return.
 
So don’t fall for the lure of a return of premium term insurance plan – we are sure you can manage your money like in Option 2 above and get yourself and much much better deal!  And to make the deal even better, go for an online pure term insurance plan – it is much cheaper and allows you complete control to choose and buy, as well as the freedom to declare everything transparently before buying the most important product of your life.