A few days ago, one of our advisors was on a call with a client about to purchase a term insurance policy. After he had provided information about his recent financial liabilities, the age and number of dependents, existing medical conditions, occupational details, educational qualifications, and lifestyle habits (read: smoking habits), we were just about to enter the details into our free calculator to compute his ideal term insurance cover when he threw a question.
“So a term insurance plan will come to my family’s rescue if I pass away during the policy tenure, which you suggest is 65 to 70 years. However, if I survive the plan and then pass away at, let’s say, when I turn 71, what happens then? Doesn’t all the premiums I paid go to waste?”
Honestly, this is a common doubt in the minds of potential policyholders when they are about to purchase a term insurance plan, as per our experience. And each time, as an answer, our advisor says this - “this is a valid query. However, there’s an answer to your question - Return of Premium.”
While the name is self-explanatory, in the case of the Return of Premium Rider in term insurance plans, there are a few clauses, restrictions, and limitations that you must know before you decide to purchase it. After all, there must be some reason as to why we at Ditto, don’t recommend this rider. Let’s take an in-depth analysis of the Return of Premium Riders!
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What is the Return of Premium Riders in Term Insurance Plans?
Much like the name suggests, the Return of Premium Rider in Term Insurance extends the unique perk of reimbursing the accrued premium paid to date by the insured towards their term insurance policy. However, there are 2 things that you should be aware of regarding Return of Premium riders or ROP -
- The reimbursement is only offered to the insured if he/she survives the policy tenure
- The premium reimbursed is a total of the base premiums paid, but this does not include the GST or the rider premiums (ROP or any other term insurance riders that the insured added to their policy)
Let’s understand this with an example -
Sunil purchased a term insurance plan from one of the best term insurers in the industry when he was 25 years old. The only rider that he opts for is ROP. He is a non-smoker and has opted for coverage of ₹2 crores till he turns 60. So, his premium comes to ₹15k - ₹20k/year (including the GST) for the base plan + premiums for ROP.
Now, thanks to his healthy lifestyle, non-risky habits and hobbies, and regular health check-ups, he survives his policy tenure. After his policy tenure ends at 60, as promised by the insurer, his Return of Premium rider kicks in, and his entire premium (minus the GST and the additional premiums for ROP) is reimbursed as a perk of availing of a term insurance plan and surviving the tenure.
That sounds golden, right? And yet, there’s a slight doubt as to if you should at all avail of this term insurance rider. Let’s weigh the pros and cons to understand why this is not a highly recommended term insurance add-on.
Should You Opt for a Term Insurance Policy with a Return of Premium Rider?
When it comes to purchasing a term insurance plan, there are no returns involved in the vanilla variant. Term insurance plans are crafted with the intention of offering coverage to the insured for a particular tenure. Suppose the policyholder passes away during this tenure. In that case, the term insurance cover is offered to the insured's beneficiary, thereby financially enabling them to continue with their life stage goals. This amount so extended is actually an income replacement for the insured individual.
Now, term insurance policies are pretty popular, considering their affordability and convenient access to an extensive cover amount. Additionally, the product also offers an ample scope of customisation to suit one’s tailored financial goals and requirements. While Rider of Premium is one such rider, it has its set of pros and cons -
- What are the Pros of Return of Premium Riders in Term Insurance Plans?
- A financial return is guaranteed: While multiple types of life insurance products come with a guaranteed return (like ULIPs and Endowment plans), term insurance plans are not one of them. On the flip side, a Return of Premium rider in term insurance plans extend this perk of guaranteed returns -
- The insured gets a Return of Premium if he/she survives the plan tenure.
- The beneficiaries gain the death benefit if the policyholder passes away during the plan's tenure.
- Tax benefits: The premiums paid towards the Return of Premium rider in term insurance fall under the tax benefits extended by Section 10(10D).
2. What are the Cons of Return of Premium Riders in Term Insurance Plans?
- High premiums: Since Return of Premiums ensures a guaranteed payout, it imposes a financial risk on the insurers. To spread the risk and bring the insured’s skin into the game, term insurance providers require you to pay a much higher premium. This goes against the major USP of term insurance plans - affordability.
The additional funds so spent coil have been utilised to set up a savings account or to invest in channels that yield higher returns over higher risks involved (mutual funds, ULIPs, stock market, etc.).
- Multiple conditions: Since the Return of Premium riders in term insurance plans offers a guaranteed return, term insurers impose a list of terms and conditions. Only if these conditions have been fulfilled by the policyholder can the Return of Premium perk be availed and tapped into. Considering that term insurance providers already require a list of stringent eligibility criteria, these additional conditions would pose a serious hurdle.
- Inflation is unaccounted for: The accrued premiums thus returned do not account for the current inflation rate. Thus, the real value of the premiums reimbursed erodes over time.
- Chance of lower death benefits: The inclusion of Return of Premium Riders in term insurance substantially spikes the premium. This might motivate potential policyholders to opt for a lower cover amount in an effort to get pocket-friendly premiums. Now, the primary objective of term insurance is to act as an income replacement and ensure the smooth achievement of life-stage goals for your family without any financial hiccups (in the event of your unfortunate absence). If you opt for a lower cover amount, it defeats the purpose of purchasing a term insurance policy.
Whenever you opt for a term insurance rider, you must carefully weigh the pros and cons and look into the difference in premiums to gauge whether the purchase is worth the perk it extends. Unfortunately, in the case of the Return of Premium Riders in term insurance policies, the pros do not outweigh the cons. Thus, the rider is not commonly recommended if you are seeking an affordable and lucrative term insurance policy.
However, if you are set in your ways to opt for a Waiver of Premium rider in your term insurance policy, here’s a look at the top term plans offering this rider -
What are the Best Term Insurance Plans with a Return of Premium Riders?
- HDFC LIFE Click 2 Protect Super: This plan is slightly more expensive than the Click2Protect Life plan but offers similar features. It includes a smart exit perk with an in-built terminal illness benefit and comes in three variants:
- Life: In this variant, the sum assured is paid out as a lump sum upon the policyholder’s death. It includes a terminal illness perk, where the sum assured is paid out once the policyholder is declared to have a terminal ailment with only a few months to live.
- Life Plus: In addition to the death benefit and terminal illness perk, this variant offers an Accidental Death Benefit. The nominee receives an additional amount (over and above the base sum assured) if the policyholder dies due to an accident.
- Life Goal: In this variant, the sum assured payable on death varies with the policy year. The variation is determined by the Amortisation Rate or Level Cover Period, chosen by the policyholder at the plan's inception.
The policy offers some of the best riders in the industry:
- Waiver of Premium on Critical Illness
- Return of Premium
- Waiver of Premium on Total and Permanent Disability
- Spouse Cover Option
- Option to alter premium frequency
- Option to change Premium Payment Term from regular pay to limited pay
- Renewability Option at Maturity
- Life Stage Option
- Death benefit as an instalment option
Drawbacks: Like any other life insurance product from HDFC Life, this plan is a tad bit expensive compared to the others in its category.
2. Max Life Smart Secure Plus: The Max Life Smart Secure Plus Plan is comprehensive and affordable. It includes an in-built terminal illness perk and offers three variants across its critical rider. The plan extends a voluntary top-up sum assured and provides a joint life cover option.
It also features the Premium Break option, allowing policyholders to take a break from paying premiums in case of a financial crunch. This perk can be used only twice during the policy tenure. Additionally, the policy offers Waiver of Premium Plus, Critical Illness (covering 22 or 64 illnesses), and a Disability Rider.
Drawbacks: Although the policy includes a terminal illness benefit, insurers do not disburse the full sum assured upon the diagnosis of a terminal ailment with a poor prognosis and a few months to live, as declared in writing by a doctor. Instead, they only pay out a portion of the sum assured.
3. Bajaj Life Smart Protect Goal: This popular term insurance plan from Bajaj Allianz offers coverage until you are 99. The Smart Protect Goal plan includes four variants: Life Coverage, Child Education Extra Cover, Life Cover With Joint Life, and Increasing Cover. These variants adjust your policy's sum assured payout and amount based on changing financial requirements.
The variants also offer riders including Critical Illness Benefits, Accidental Death Benefits, Waiver of Premium Benefits on Critical Illness, and Accidental Total Permanent Disability Benefits. Additionally, there is no upper limit to the cover amount offered; it depends on the underwriting's decision about your eligibility.
Drawbacks: The Bajaj Allianz Life Smart Protect Goal plan offers a Critical Illness Rider, but it does not include an Accelerated option. You can only select the standard CI rider, which adds the critical illness coverage amount to the base sum assured. Moreover, this plan does not feature a Zero Cost Option, terminal illness benefit, top-up option, or Waiver of Premium.
4. TATA AIA Sampoorna Raksha Supreme: The TATA AIA Sampoorna Raksha Supreme is one of the flagship plans from TATA AIA. It is affordable, comprehensive, and offers extensive coverage. The plan includes an in-built terminal illness perk, life stage benefits, top-up sum assured, and premium payment flexibility. It comes in four variants: Life Option, Life Plus Option, and Life Income Option, varying across payouts.
The plan offers several riders:
- Accidental Death Benefits
- Accidental Total and Permanent Disability Benefits
- Criticare Plus Benefits
- Criticare Benefit
Drawbacks: The minimum income eligibility for policyholders is ₹10 lakhs, which restricts the pool of eligible applicants. Moreover, the insurer’s recent issues with operation efficiency have also become a problematic hurdle.
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Conclusion
A Return of Premium Rider in term insurance policies is a frequently marketed perk wherein you can get a reimbursement of the accrued premiums (minus the rider premiums and GST) if the policyholder survives the policy tenure. However, the rider requires a considerable spike in premiums and comes with a long queue of terms and conditions, and hence is not commonly recommended. Instead, you should opt for term insurance riders like Waiver of Premium, Critical Illness Rider, Total and Accidental Disability Rider, Increasing Cover Option, etc.
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