Overview:
The purchase of term insurance plan is a smart move on your part for more reasons than one. While you create a blueprint drawing a financial roadmap for the future, the pride of place certainly belongs to the protection of your family in your absence, which may always be a possibility in life’s uncertainties. It is wise to be ready for unforeseen realities of life, rather than put the lives of your loved ones into jeopardy on your demise, grappling with the loss of income and liquidating your liabilities. Leave alone fulfilling the future aspirations of your children and a decent lifestyle after that; the crisis is hard to tackle. It is term insurance plans that can obviate such eventualities. Therefore, the safety net for your family needs a meticulous study for the options open to you to enable you to choose the best possible term insurance plans available, rather than cut a sorry figure with an uninformed decision later.
The basics of term insurance plans:
You must know first that a life insurance policy is a contract entered into by you with the insurer to pay a death benefit equaling to the sum assured to your nominee in the event of your demise during the term of the policy to comply with the contract, you are required to pay mutually agreed upon premium at defined periods. Should you outlive the policy term; some plans like endowment and ULIP pay you maturity benefits in the form of sum assured plus bonuses. But term insurance plans are simpler, being an only pure protection plan that has a single payout paid to your nominee on your demise which is the sum assured. The simplicity of the plan translates into an offer of a very high sum assured instead of a nominal premium, which is the primary reason for its popularity.
Types of term insurance plans:
As understood, term insurance plans are pure risk plans offering an only death benefit, but there are two options involved. One is to receive the payout in a single lump-sum amount or stagger it in monthly instalments over some time. There are variations of best term insurance plans, where the addition of riders enhance the scope of your cover and add value to it. Of late, some insurance companies have extended the scope of term insurance plans by returning your premium on termination of the policy once the term is over. This is known as TROP (Term Insurance Return of Premium) in insurance parlance. While it appears attractive at first sight, on the flip side, you end up paying a higher premium for the TROP option.
Term Insurance Return of Premium (TROP):
On the face of it, the offer may look very attractive. But your premium goes up substantially, and on your survival, you receive the exact amount of premium you have paid during the policy term and not a single farthing as interest. So, for the higher amount over a period returned without any additions, the common notion is that there is no loss. Far from it, the quantum of premium you pay is not only inordinately high; the zero interest return in effect erodes the accumulated premium value heavily due to inflationary pressures. By blindly leaping into the purchase of TROP term insurance plans, are you not missing the woods for the trees? A rather sensible approach would be to consider purchasing an endowment for retirement with the differential amount for the same term period that would give you returns multiple times of the return of TROP, enabling you to make a handsome corpus for wealth creation. Is it not food for thought for other survival benefits to consider as worthwhile?
Reasons for high premiums in TROP:
The usual term insurance plans are designed to cater for death benefit only. Since there are no additional payouts, the sum assured offered is very high against the nominal premium. This is possible because of the simplicity of the plan, which is its USP. If the company has to pay TROP as survival benefit, the administrative costs go up and to make the plan viable; the company increases the premium by two to three times. A TROP plan involves payment of survival benefits comprising the sum of all premiums after appropriating applicable taxes, underwriting expenses and rider premiums. Coupled with this is the administrative and operational expenses, that compels the company to raise the level of premiums substantially high to make the plan work for them. It makes sense to understand that every service comes at a cost. Should the company return the entire accumulated premiums to you; how will the company run the show? Therefore the expenses for maintenance are recovered from you in the form of higher premium to run the TROP plan.
Also Read: Top 5 Best Life Insurance Plans in India
The options before you:
When you go for term insurance plans, the basic motive is to protect your family in the event of your demise, for a cover that extends up to your retirement. Does it make sense not to consider your retirement plans? The term insurance plans are not the end of all of your financial planning but only an important cog in the wheel. The earlier you shed the wrong notion that insurance products are not tools of investment, but only a cover against uncertainties of life, the better it is. Some plans also help you build wealth in the long term that will take care of your life post-retirement when you will have no other income to sustain term insurance plans.
Bottom Line:
Prudence rather than emotion should determine the type of term insurance plans suitable for you. Considering all the possibilities, it is prudent to purchase traditional term insurance plans, based on your resources, liabilities and the type of lifestyle envisaged while protecting your family. The savings from not opting TROP will enable you to a judicious purchase of other plans that will help you live a life of peace and comfort post-retirement. After all, wisdom is the deciding factor that will help you choose the right plans that will provide you with a safety net covering all phases of your life. Certainly jumping into the TROP bandwagon is not truly the win-win situation that is widely projected.
