Explained: What is Term with Return of Premium Plan?

Term insurance with return of premium plan is popularly known as TROP. It’s one of a kind term life insurance plan that offers the benefit of the return of the premium as a survival benefit to the insured person in case they survive the policy tenure. Like any other standard plan, the TROP also aims to provide financial protection to the family of the policyholder against any eventuality.

Standalone term policies provide death benefits at the lowest premium options. However, if the policyholder survives beyond the policy term, the insurer isn’t liable to pay anything to the policyholder. But conventional India is constantly looking for quantifiable returns on its investments. Having observed this behaviour pattern, insurance companies have started offering TROP plans.

What’s in it for you? 

Identified as a sub-category of term insurance, TROP offers customers all the benefits of term insurance in addition to the return of premiums paid towards the policy if the insured survives the policy tenure. Now, this is a great concept for those who hesitate to pay the insurance premium and look at it as an added expenditure with no guarantee on returns.

In case of non-payment of premium, TROP plans offer proportionately reduced benefits, unlike a term plan which will directly get lapsed. Notably, due to ‘all premiums back’ facility, the premium rate of these plans are slightly higher than a pure term insurance plan. Consider this: For a 30-year-old the basic term cover of Rs 1 crore costs Rs 9,276 per annum for the policy term of 30 years. If the same person buys a return of the premium plan the cost works out to Rs 18,396. The premium rates jump up by almost 100%.  This is because in a regular term plan only mortality charges are paid whereas in TROP plans a customer also pays for a guaranteed return of all the premiums.

For example, consider a policy with Rs 10 lakh sum assured for a time period of 10 years. The annual premium is Rs 1000. If the policyholder dies, the family will be paid Rs 10 lakh worth of cover. But if the insured survives the pre-determined term, they will receive a return on the entire premium amount i.e. Rs 10,000 (Rs 1000 x 10).

Key things to note about TROP plans

Technically speaking, TROP plans appear as a zero-cost investment. While the premium may be higher than any regular term plan, all premiums paid are returned to the policyholder at the end of the policy term in case of no claims. Besides, a pure term plan levies 18% GST across all premiums whereas TROP GST is 4.5% annually and 2.25% thereafter.

Both basic term and TROP plans also offer the option of rider benefit to enhance the coverage of the policy. Insurers always offer a variety of optional riders/add-ons like personal accident, physical disability, etc. that can be bought while signing up for the policy. It can even be added during policy renewal. Riders make the policy much more comprehensive and add value to the purpose of investing in an insurance product.

TROP plans provide tax benefits as per the prevailing Income Tax laws. As of now, both the premium paid and the amount drawn are tax-free under sections 80 C and 10 (10D) of the Income Tax Act, 1961. The tax exemption is applicable up to the maximum limit of Rs 1.5 lakh.

Surrender and paid-up value on TROP plans

The surrender value of TROP plans depends on the payment option chosen by the customer. It’s a given fact that surrender value is higher for single premium plans (entire premium is paid at once). Hence, it’s wise to discuss the surrender value with your insurance well in advance. Choose the payment option where you get maximum benefit.

Meanwhile, paid-up value is another key component of TROP plans that policyholders must keenly make a note of. Companies require customers to pay the premium for a minimum number of years (varies insurer to insurer) before it enables the feature where your policy shall continue at a lower cover despite non-payment of premium.

It’s best not to assume anything beforehand while buying any insurance product. Ask your doubts before signing the policy. Read the fine print carefully.

Time period for TROP plans

It’s important to note that TROP plans last for a limited period like 10, 15, 20, 25 or 30 years. Most of these plans have a maximum maturity age for policyholders, that is, 70 years. Some insurers do offer policies even beyond 70 years. You’ll have to look for a plan that suits your future financial goals. Remember the policy term cannot be extended later.

It’s often advised not to prioritise maturity benefits while selecting the insurer or policy. The ones offering higher returns may not be cost-effective in comparison. Instead, one can look for offers where a discount is available on a large sum assured.