Zero Cost Term Insurance Explained

What is Zero Cost Term Insurance?

Zero cost term insurance is a type of term plan that comes with an optional exit feature. The built-in exit window (usually determined by age/policy year) allows surrendering the policy and getting a return of base premiums, excluding rider costs and other charges. But the availability, timing, and minimum-paid years for exit varies across insurers.

For example, a ₹1 crore cover for 40 years bought at the age of 30, with premiums paid for 18 years can have an exit window at 55 years (as per the terms of the plan).

Introduction

From repaying home loans to spending on children’s education, life’s full of liabilities. And that’s why buying term insurance makes sense. But when major liabilities end, many wish to surrender the policy and get a refund.

This is where a term plan with a special/smart exit option can help. Insurers market this idea as “zero cost insurance” because your net cost after getting the refund becomes close to zero.

But is it beneficial? Because the refund is for base premiums only, excludes rider charges and other costs, and loses value due to inflation.

The point is, there’s no harm if your term plan has a smart exit option. But it’s not worth paying a higher premium and stretching the tenure just for the early exit perks. That’s like spending unnecessarily while shopping to get a free trolley.

Instead, focus on the fundamentals, like adequate term cover, sustainable tenure, need-based riders, fair pricing, and a strong insurer claim record.

In this guide, you’ll learn:

• How the smart exit window works in a zero cost term plan? 
• The benefits and limits of zero cost term insurance
• How zero cost term insurance differs from TROP plans? 
• Who should use the exit option in zero cost term insurance?

Friendly reminder: It’s easy to get lost comparing policies and premiums. Instead of spending hours on it, why not get personalised insurance advice from Ditto? We offer free consultations with zero spam! Just 30 minutes to clarify all your doubts. Book a call now!

How Does A Zero Cost Term Insurance Plan Work?

Step 1: Policy Setup

• One chooses their sum assured (usually 10–20 times of annual income), policy term, and premium-pay term.
• The benefit illustration mentions the pre-fixed conditions and window to qualify for zero cost exit (e.g., at ages 50/55/60 or after completing 15/20/25 or more years).

Step 2: Payment and Cover

• The premiums are paid like a standard term plan.
• The life cover stays active, and in the event of death during the term, the nominee receives the benefit.

Step 3: Using The Smart/Special Exit Window

• If you don’t exit: The term cover runs till maturity and no survival benefit is paid.
• If you exit: Exiting the policy within the pre-fixed window refunds all eligible base premiums ending your cover.

Source: IRDAI Annual Reports & Public Disclosures (FY 2022-25)

Important points to remember about zero cost term insurance:

• The minimum duration for premium pay is usually 10–15 years (or more depending on the plan).
• No custom dates or partial exits are allowed.
• The refund applies to base premiums only.

Key Features of Zero Cost Term Insurance Plans

01

Promises Mid-Life Financial Flexibility

You can exit the policy when loans are cleared, dependents are well set, and assets are in place. As a plus point, you can redirect the refund towards retirement, higher education, or fulfilling new business goals.

02

Offers Freedom To Surrender The Policy

Consumers value freedom because the ability to make future decisions is based on changing circumstances. Zero-cost term plans reduce the psychological barrier of feeling "locked-in" and makes it easier to buy a higher cover with room to adapt later.

03

Gives Better Value than TROP

Zero-cost term premiums are significantly less than TROP which makes sense if you're sure about exiting the policy mid-term (for e.g., planning early retirement, expecting inheritance, or building alternate protection via equity, real estate).

04

Retains Standard Tax Benefits

Base premiums in zero-cost term plans continue to qualify for Section 80C deduction (up to ₹1.5 lakh a year, subject to usual conditions). Eligible health-related riders can be claimed under Section 80D, and the death benefit remains tax-exempt for your nominee under Section 10(10D), just like a regular term plan.

Limitations of Zero Cost Term Insurance Plans

Zero cost term insurance may offer flexibility, but has strict rules. Let’s have a closer look.

• It has a narrow exit window: One can only exit the policy after reaching a specified age or completing the fixed number of years. If you stop premiums outside the exit window, there’s no refund.
• The refund loses value: Zero cost exit term plans only refund the base premium when you exit. Rider charges, underwriter loadings, and other policy charges are excluded.
• It increases total premium outgo: To qualify for the early exit, you usually need to pick a longer policy term than you actually need. That means paying premiums for extra years when your dependents may no longer rely on your income, which pushes up the total cost and can leave you overinsured.

Zero Cost vs. Return of Premium (TROP) Term Insurance

Here’s a clear comparison between zero cost and return of premium term insurance across different aspects.

How to pick between zero cost and TROP plans :

• Choose zero cost term insurance if you want the flexibility to stop coverage mid-way and get a refund.
• Choose TROP if you want guaranteed premium refund at maturity and can afford higher premiums.

Tax Benefits Under Zero Cost Term Insurance

Zero cost term plans get the same tax perks as standard term insurance. Premiums qualify for Section 80C if the policy is in your or your family’s name and the premium is within 10 percent of the sum assured. Health riders may get Section 80D deductions. Death benefits stay fully tax free under Section 10(10D).

Why Choose Ditto For Your Term Insurance?

At Ditto, we have helped 8,00,000+ customers become smart and informed insurance buyers. That’s why customers like Rajan trust and recommend us.

• No-Spam & No Salesmen
• Rated 4.9/5 on Google Reviews by 15,000+ happy customers
• Backed by Zerodha
• Dedicated Claim Support Team
• 100% Free Consultation

Need clarity before you buy? Book a FREE consultation with our team. Slots are limited, so schedule your call now!

Buying Zero Cost Term Insurance: Ditto’s Take

Buying a zero cost term insurance is an individual decision guided by more than one reason. Here’s a smart checklist by Ditto to help you plan better.

• Prefer smart exit over return of premium plans since TROP costs more and refunds only at maturity.
• Use the built-in zero cost/special exit feature only when big liabilities end (typically around 50–60 years) and life cover is no longer required.
• Zero cost term works best for young earners who want high cover now with the option to surrender before 65–70 for early retirement or more financial freedom.
• Set the policy term to match the years your family truly depends on your income instead of stretching it to 80–85 years just to unlock the exit window.
• Exit only when you’re financially independent with no dependents, as staying covered near maturity can be smarter than taking a refund eroded by inflation.
• Focus on affordable protection and the freedom to exit later, treating any refund as a bonus rather than the main reason to buy the policy.

Above all, term insurance with a zero-cost/smart exit option works well for young earners planning early retirement and for people who’ve cleared major liabilities and no longer need a large life cover.

FAQs