What is Return of Premium rider in Term Insurance?

Introduction

Life is unpredictable, and we never know what the future holds. That's why it's important to have a term insurance plan to secure our family's financial future. But what if you could get back all the premiums you paid over the years if you outlive the policy term?

That's where the return of premium rider in term insurance comes in.

What is Return of Premium rider?

The return of premium rider is an additional feature that some insurers offer as part of their term insurance plans. As the name suggests, it enables policyholders to receive a refund of all the premiums paid if they survive the policy term. But is it really a good option?

To help you understand better and make an informed decision, here is a comparison table for different policy options:

As you can see from the table, the return of premium rider comes at a cost. You will have to pay a higher premium to get this feature, and the refund amount is not significantly higher than the additional premium paid.

There are many popular term plans in the market which are smoothly offering return of premium rider option as an add-on in their plan like  HDFC Life Click 2 Protect Super, Max Life Smart Secure, ICICI Pru iProtect Smart, etc.

Let's take a closer look at the pros and cons of this rider.

Pros of the Return of Premium Rider

• Refund of Premiums Paid:

The biggest advantage of the return of premium rider is that you get back all the premiums you paid over the policy term if you outlive the policy term. This can be a significant amount, especially if you have paid premiums for a long duration.

• No Tax Implications:

The refund of premiums paid under the return of premium rider is tax-free as per section 10(10D) of income tax act. This means that you don't have to pay any taxes on the amount received, which can be a significant benefit.

• Lower Risk:

With the return of a premium rider, you are essentially getting a risk-free investment. Even if you outlive the policy term, you will get back all the premiums paid. This can give you peace of mind and security.

Cons of the Return of Premium Rider

• Higher Premiums:

The return of premium rider comes at a cost. You will have to pay a higher premium for the same coverage amount as compared to a regular term insurance plan. This means that you will end up paying more over the policy term.

• Opportunity Cost:

The higher premium for the return of premium rider means that you are losing out on the opportunity to invest that money elsewhere. If you had invested the additional premium in other investment options, you could have earned a higher return.

• Limited Options:

Not all insurers offer the return of premium rider/ add on in term insurance plans. This means that your options for getting this feature are limited, and you may have to pay a higher premium for the same coverage amount.

Is Return of premium really worth it?

Here's an example that will help you all  calculate the likely cost and potential benefit of a return of premium rider.

Meet Rajesh, a 40-year-old who has recently bought a 30-year term policy worth Rs. 25,00,000 with annual premiums of Rs. 12,000. If he decides to add a return of premium rider to the policy, the cost will increase to Rs. 20,000 per year, which is Rs. 8,000 more than his current premium. Without the rider, Rajesh will end up paying a total of Rs. 3,60,000 over the policy's life. However, if he decides to go with the rider, the total cost will jump up to Rs. 6,00,000.

The real question here is whether the additional cost of Rs. 2,40,000 is worth it for the refund of premiums. This depends on Rajesh's opportunity cost, i.e., what he could earn if he invested the extra money instead. For example, if Rajesh decides to invest the extra Rs. 8,000 annually in a mutual fund with an annual growth rate of 8% , he could potentially earn around Rs. 10,45,957 after 30 years. In this scenario, investing the money instead of adding the rider would be the better choice for Rajesh.

However, this calculation is not the entire story, as it does not take into account Rajesh's risk tolerance. If Rajesh has a low-risk tolerance, he can instead invest the money in Fixed deposit (FD), paying a 5 % interest rate, in that case he would still earn the returns which is more than what he would pay without the rider.

Ultimately, Rajesh must consider his individual circumstances, his risk appetite  and weigh his options before making a decision.

Conclusion

In conclusion, the return of premium rider in term insurance is a double-edged sword. While it offers the advantage of getting back the premium paid if one outlives the policy term, it comes at a higher cost than regular term insurance. It may be a good option for those who want to ensure their families' financial security and get some money back in case of survival. However, it may not be a suitable option for those who prioritize affordability and adequate coverage. Ultimately, the decision to opt for the return of premium rider in term insurance depends on individual preferences and circumstances. One must weigh the pros and cons carefully and make an informed choice. It's always recommended to take proper insurance advice and  compare various insurance plans, including those with and without the return of premium rider, before making a decision.

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