What is a Term Insurance Plan with a Return of Premium and How Does it Work?

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What is a term insurance plan with a return of premium, and how does it work?

A term plan with a return of premium is similar to a standard term plan. It works as a life cover and provides a death benefit for the insured. Read here to know what a term insurance plan with a return is of premium and how it works.

  • Dec 07, 2022

One type of term insurance policy that is specifically created to meet the needs of policy purchasers is term insurance with return of premium (TROP). Similar to a regular term insurance plan, the TROP provides the advantage of financial protection for the insured’s family against any sort of emergency. But one of the distinguishing characteristics of term insurance with a return of premium plan is that it additionally provides the benefit of survivor rewards.

What is a Return of Premium Term Insurance Plan?

With one significant exception, the term plan with return of premiums (TROP) is similar to a standard term insurance policy but reimburses your premiums when the policy matures. You pay the yearly premiums throughout the policy’s term. If you live longer than expected, the policy will reimburse 100% of your premium payments, known as the “survival benefit,” tax-free.

TROP effectively lowers the cost of your policy to almost nothing while providing you with more substantial financial advantages. The policy pays your beneficiaries the death benefit, which is a predetermined amount for which you pay the premiums if you pass away during the term.

What is the Operation of Term Insurance with Return of Premium?

Consider a term plan with a ₹30 lakh rupee cover for 10 years with a premium of ₹3000 rupees yearly. The family would receive ₹30 lakh as the sum assured amount in the event of the life assured’s passing. However, the insurance provider will refund the whole premium amount, or ₹30,000, if the life assured lives out the policy’s entire term (Rs.3000 X 10).

A term return of premium plan is a non-participating insurance policy that provides the insured’s family with a death benefit in addition to the return of the premium as a survival benefit if the life assured survives during the period of the policy.

Benefits of Term Insurance with Premium Refund

Here are some of the key characteristics of the term plan with the return of premium:

Maturity Benefit or Survival Benefit

The term return of the premium policy differs from a pure term insurance policy as it offers a maturity or survival reward. Under TROP, if the policyholder survives for the duration of the insurance, the entire premium is returned to them as a survival reward. On the other hand, a conventional term insurance plan does not provide a maturity benefit.

Sum Assured

The life insurance coverage that is provided by the insurance company to the policyholder at the time of plan enrollment is referred to as the sum assured in the term plan with a return of premium. The TROP gives a lesser sum insured amount than a pure protection plan because the policyholder receives their premium refund.

Surrender Value

Depending on the method of payment selected by the policyholder, the surrender value of term insurance under a return of premiums plan varies. The surrender value is offered more for single premium policies where the entire insurance premium is paid at the time of application. Insurance companies base their calculation of the surrender value on several variables. Therefore, before obtaining the policy, a person should make an estimate of the amount they will get as a surrender benefit.

Death Benefit

In TROP, in the unfortunate event that the insured individual passes away during the policy term, the death benefit is offered as the complete sum assured amount to the beneficiary of the policy. The sum guaranteed is determined by the kind of coverage and premium payment method selected by the policyholder when the policy was purchased.

Tax Benefit

According to Sections 80C and 10(10D) of the Income Tax Act, the premium paid toward the policy up to the maximum of ₹ 1.5 lakh, and the maturity proceeds are tax-exempt.

Term insurance with a return of premium is the most fundamental kind of life insurance available on the market. The rates for a term insurance plan are significantly less expensive than those for an endowment or ULIP plan. Additionally, you get the money that is guaranteed to cover your life. With a term insurance plan, you may protect your life for as little as ₹7,000 for up to ₹1 crore (actual sum assured and premiums may differ from one insurer to another). Because it will pay out the death benefits if your other investments don’t due to things like turbulent markets, term insurance is a wise way to supplement any other investments you may have made (particularly in the case of ULIPs). The fact that you may leave behind a sizable sum of money for your family without having to pay top dollar for it makes it also quite practical.

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Ref. No. KLI/22-23/E-BB/492


- A Consumer Education Initiative series by Kotak Life

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