Not on Good Terms

Return of premium plans are complex and expensive. Regular term plans are a better option.
Chandralekha Mukerji        Print Edition: September 2013
Not on Good Terms

Term plans have become popular over the years. One reason for this is the introduction of online policies with 30-40% lower premiums. Even so, there are consumers who expect returns from an insurance plan. It is to cater to this segment that insurers have launched 'return of premium', or ROP, plans.

"While what customers need is the primary vector of any product design, what they want is also important. Research indicates that Indian customers expect some return from life insurance policies, at least the capital," says V Viswanand, director & head, product management and persistency, Max Life Insurance.

RETURN OF PREMIUM EXPLAINED
It is a term plan, with death benefits, that returns the premium paid if the policyholder survives the policy term. In regular term insurance, insurers pay only when the insured person dies.

Consider a policy with Rs 50 lakh cover for 20 years for which the yearly premium is Rs 5,000. If the insured dies, the family will be paid the sum assured, that is, Rs 50 lakh. However, if the insured survives the term, the insurer will return the premium or Rs 1 lakh (Rs 5,000 x 20).

FANCY OPTIONS
ROP plans have more premium payment options. For instance, Bajaj Allianz's Term Care Plan lets you choose between payment of premium throughout the term and paying the full premium when you subscribe to the plan. Similarly, Max Life has a relatively expensive short-term payment option, wherein you get protection for 20-30 years but pay premiums for only 11 years.


ROP plans also have a 'paid-up' option if you default on premium payments. This means that if you stop paying the premium after at least three years, the policy continues, but with reduced benefits.

While the premium paid will be returned at maturity, the nominee will get a reduced sum assured if the insured dies. This reduced sum assured is a percentage of the original cover with respect to the number of premiums paid against the original term.

It is important to know that the exact sum will differ for each policy. There is no standard calculation that is used by all insurers to determine the sum assured.

Further, surrender benefits also differ from plan to plan. While Max Life returns all premiums paid, HDFC Life returns only 75%, excluding the first-year premium, additional premiums and taxes.

Apart from covering natural death, these plans also provide benefits such as accident and disability covers. But, while some add-on protections are built-in, customers have to pay for others.

UNDERWRITING AND PRICING
The underwriting is similar to term plans. "All things being equal, there is no difference in the way pure term and return of premium term plans are underwritten," says Sanjay Tiwari, vice president, strategy and product, HDFC Life Insurance.

However, they are much more expensive than regular term plans. The premium rises further with any additional feature that you might need. "In term plans, the premium depends upon the expected value of the claims. However, unlike term plans, where the benefit is uncertain, in return of premium plans, the benefits payable at death (sum assured) and maturity (return of premium) are fixed. Therefore, premiums for these plans are higher," says Sunil Sharma, chief actuary, Kotak Life Insurance.

VERDICT: A TERM PLAN IS BETTER
ROP plans are marketed in such a way that they look like 'free insurance'. However, they are not the best option. "If you choose one of these plans over a term plan, you are foregoing the interest you could have earned by investing the premium difference," says Anil Rego, CEO, Right Horizons Financial Services.

For example, an ICICI Pru iCare term policy with a cover of Rs 20 lakh for 15 years will cost a 30-year-old Rs 3,708 a year. However, a return of premium plan from the same insurer will cost Rs 31,768. This means a difference of Rs 28,060 every year for 15 years.

Now, if the difference, Rs 28,060, is invested for 15 years at an interest rate of 10% a year, it will return Rs 9,80,689. Choosing a return of premium plan will get you just the premium or Rs 4,76,520. The difference, or your loss, is a considerable Rs 5,04,169.

"A return of premium plan charges twice or thrice a normal term plan and still cannot provide the same level of life cover. If an investor is looking for returns, I would suggest investing in a unit-linked plan. It at least gives compounded returns," says Yashish Dahiya, CEO, Policybazaar.com.

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