Can term life insurance be refundable?

In August 2019, Mr Kumar, who turned 60 the same month, received a refund of premium payment of Rs 1 lakh from an insurance company. At the age of 40, he had purchased a Term Insurance Return of Premium (TROP) plan, which provided him with the option of getting a refund of premiums paid, in the case of having survived the tenure of the plan. As he was hale and hearty after the 20-year tenure of the policy, the insurer refunded his annual premiums of Rs 5,000 made over a period of 20 years. Like Mr Kumar, any individual can opt for a TROP or Return of Premium (ROP) plan and avail refund on maturity.

Understanding term life insurance plans:

With affordable premium rates and flexible tenures, the new-age online term life insurance plans have become popular in India. The key benefit of a term life insurance plan is the financial security it provides to the beneficiaries of the policyholder in the case of any unfortunate eventuality.

Insurance companies calculate premiums for term insurance plans based on the health conditions, the life expectancy and the age of the individual. Insurers often ask the individual to conduct a medical check-up before finalising the policy.

Apart from providing a financial security cover to an individual’s family, the term insurance plan also offers tax-saving benefits under Section 80C of the Income Tax Act. Premiums up to Rs  1.5 Lakhs, including for the individual, the spouse, and the children, can fall under this category, subject to other investments made by the individual. Death benefit payouts to the nominee are exempt from tax under Section 10D.

Understanding refundable life insurance plans:

Also known as term insurance with money back, this is a form of term life insurance providing a return of the paid premiums on maturity if the policyholder survives the policy term. In the case of the policyholder’s death during the policy term, the beneficiaries are provided with the death benefit.

A refundable life insurance plan or a TROP plan has several advantages as compared to pure term life insurance plans. Some of the benefits are as follows:

  • Guaranteed returns of the premium: A refundable life insurance policy allows a policyholder to receive the paid premium amount ranging from 100% to 115%. But, the refunded amount does not include taxes or other charges that the policyholder might have paid.
  • Tax benefits: Being a simple refund, the premium amount returned to the policyholder is exempt from tax.
  • Flexibility: One can not only select a TROP plan according to the individual’s unique financial requirements but also avail of flexible premium payment options. One can choose to pay premiums on a monthly, quarterly or annual basis.
  • Paid-up option: Many of the refundable life insurance plans come with a ‘paid-up’ option. This means that if the policyholder defaults on premium payments, or completely stops paying the premium, the policy still continues with reduced benefits. Insurance companies, however, mandate payment of premiums for a specified number of years to avail of this benefit.
  • Facility to avail optional riders for enhanced coverage: One can avail riders like accidental death rider, critical illness rider, or waiver of premium on disability rider along with the TROP plan. Additional coverage in the form of riders helps to make the policy more comprehensive. One must, however, understand that the additional premium paid for availing the rider benefits is not refundable.

But a refundable life insurance plan is more expensive than regular term insurance plans. Also, the premium amount does not earn any interest. If an individual invests the same amount of money in other financial instruments like PPF or equity funds, one can make better returns.

Conclusion:

Refundable life insurance plan or the TROP plan provides dual benefits of providing financial security to a policyholder’s family in the case of an unfortunate event along with assured premium return, in the case of the policyholder surviving the tenure of the policy. In simple words, it offers both maturity benefits as well as death benefits in a single policy.

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