The importance of life insurance in financial planning cannot be overstated, and yet, many of us fail to include a life insurance plan in our personal finance portfolio. With the rise in standard of living and the steady increase in inflation rates, there is no choice but to build a solid financial foundation that ensures the family is financially secure in the event of the untimely demise of the sole breadwinner.
The term plan is the most basic of all life insurance products. It offers maximum coverage at a minimum premium, thus protecting the family both in the short-term and the long-term. Such a term plan provides a substantial death benefit or sum assured to the nominees or beneficiaries of the policy. The amount — payable to the nominees in the event of the death of the policyholder — goes a long way to help the family meet its immediate and future financial obligations.
However, if the policyholder survives till the end of the term, he or she receives no returns; for a term plan is a pure risk protection plan. What this means is that there are no survival benefits. It is for this reason that term plans are more affordable compared to other life insurance products that offer assured returns on maturity.
Since, traditionally, most Indians invest with the aim of earning returns, insurance companies have started offering Term with Return of Premium (TROP) plans.
TROP is a unique concept under term insurance. Here, the insured gets all the benefits of term insurance in addition to return of premiums paid towards the policy on completion of term, as a survival benefit to the insured. TROP is ideal for those who perceive term insurance as a zero investment. It is also suitable for people with irregular income as it offers proportionately reduced benefits even in case of non-payment of premium. On the other hand, a basic or pure term plan automatically ceases if premiums are not paid.
Some of the key features of TROP plans are:
Zero cost: A TROP plan, which comes with higher premiums, offers survival benefit where all the premiums paid are returned to the policyholder at the end of the term and only if there has been no prior claim.
Lower GST charges: While a pure term plan attracts 18% GST across premiums, a TROP plan invites 4.5% GST in the first year and 2.25% GST on premiums thereafter.
Riders: Prospective customers can customize TROP plans with riders, a cost-effective way to strengthen the policy and get several additional benefits. Some common riders under TROP are as follows:
- Critical illness rider: Certain pre-existing medical conditions under critical illness – such as cancer, heart attack, coronary artery bypass and paralysis — calls for major lifestyle and financial changes. The fixed benefit insurance under this rider offers guaranteed double-claim benefit, including lump sum payout on diagnosis of an illness. This amount can be used to pay for high treatment costs as well as post-hospitalization expenses.
- Accidental death Disability and dismemberment: This rider offers a percentage of the sum assured to the policyholder in case of an accident that causes death, permanent disability or even maiming. In the event of disability or dismemberment, the insured gets a certain amount of money for a specific period of time, and in case of death, a sum, in addition to the cover, is paid to the nominees.
However, before incorporating riders into your plan, it is important to assess the need for specific riders and understand the inclusions and exclusions in your policy.
To sum up, premiums across insurance policies increase with age. So the earlier you buy a pure term plan or TROP, the more you and your loved ones stand to gain. While term plans attract lower premiums compared to TROP plans for the same coverage, both these policies offer financial protection and act as an alternative source of income in case of the early demise of the bread earner. Before you buy life insurance — term, TROP or any other — compare the various policies in the market and opt for one that fulfils your financial needs, both during and after your lifetime. For, insurance is not just an investment, it is also a lifesaver.