A term insurance plan is one of the simplest forms of insurance plans. The cost of a term insurance plan is very low compared to other life insurance plan types such as endowment plans or ULIPs since their only function is the basic function of a life insurance policy i.e. to provide financial protection to the life assured’s family. A term insurance plan can be purchased as a backup or in addition to an investment instrument such as mutual funds. Thus, by paying a nominal amount on a regular basis, one can leave behind a huge sum of money for his/her family to carry on with their lives.
Term insurance requires the policyholder to pay premiums to the insurer for a certain period as decided by the insurer and insured. The policyholders have to pay premiums throughout the policy term or for a certain period less than the chosen policy term. While a traditional term plan does not pay anything if the life assured survives the policy term, a plan with the Return of Premium rider will refund the total premium amount paid throughout the term.
For example, a term insurance plan that has a sum assured equal to Rs.10 lakh may require the policyholder to pay, say Rs.7 lakh as the premium. If the individual passes away during the chosen term of the policy, the sum assured equal to Rs.10 lakh will be provided to the nominee. However, if the life assured survives the complete term and he/she had opted for the Return of Premium rider, he/she will receive Rs.7 lakh as a refund of the premiums paid.
Term insurance policies that offer Return of Premium are slightly different from the basic term insurance plans on certain parameters. Below are the details of such policies:
Each insurer and each plan mention the age restrictions of the policy. The minimum entry age is 18 years in most cases and the maximum is generally about 65 years. It is important to take note of the age restrictions and the maturity age before purchasing a policy. For example, it wouldn’t make sense for a 50-year-old individual to buy a 15-year policy in which the maximum maturity age is 60 years.
The sum assured is the maximum amount payable by the insurer to the beneficiary of the policy when the life assured individual passes away. The sum assured for a plan that offers the Return of Premium rider is generally higher than that of a traditional endowment policy because endowment policies offer returns for a comparatively long period of time whereas term plans with Return of Premium refund the complete premium amount as a lump sum at the end of the policy term.
The premium payable towards the term insurance policy is calculated based on factors such as the sum assured chosen, the policy term, additional riders opted for, etc. The premium for term plans with Return of Premium will be slightly more than the premium charged for simple term plans.
Other Key Features
Term insurance plans with the Return of Premium rider provide tax benefits under section 80C of the Income Tax Act, 1961. According to the section, the policyholder can claim the premiums paid towards the policy.