While most of us take a life insurance policy hoping that we never use it, what would happen if we make it through the duration of the policy? A term insurance plan with return of premium is one such policy which gives you something special, i.e., life insurance along with a refund of the eligible premiums you have paid throughout the policy period, depending upon the terms and conditions of the policy.
As opposed to the normal term insurance plan, which generally does not offer any maturity value, the return of premium plan lets you receive a refund of the premiums you have paid. In this way, it becomes a good choice for those people who want to secure themselves financially and at the same time get a refund of their premiums when their policy matures.
But just because you get back your premiums does not mean that you earn profits. It all depends upon the terms and conditions of your policy.
For instance, let’s assume you go for a term plan with return of premium, and you are required to pay a premium of ₹20,000 per year for 25 years. In such a case, the total amount of premium that you will have paid will be ₹5 lakh. Now, assuming that your plan promises a 100% return of eligible premium if all the terms and conditions for maturity are met, you might get ₹5 lakh on the maturity of the plan.
However, is such an insurance scheme really worth it? How is the maturity benefit calculated? When do you get the refund? And, what is the difference between a return of premium plan and a regular term plan? It’s time we examined all these in detail.
How Does a Term Plan with Return of Premium Work?
Term Plan with Return of Premium (TROP) is an insurance policy that ensures the insured receives a life cover within a fixed tenure of time and, if he survives till the end of the policy tenure, he might get back the eligible premiums. Unlike a normal term insurance policy that does not usually give the insured a maturity benefit, the return of premium plan gives some money back on fulfillment of certain conditions stipulated by the policy.
But, this money back is not always possible. The amount payable varies based on several factors including the conditions of the policy, the premiums that qualify for money back and also based on whether the policyholder meets all the conditions set out for the maturity benefit.
Let us now see how maturity benefit works, what premiums can be refunded, exclusions and limitations, and how the payment is taxed in India.
How Does Maturity Benefit Work?
Upon the maturity of a term plan with a return of premium, the insurer evaluates whether the policyholder fulfills the required conditions for the maturity benefit.
In case the policyholder survives the policy term and the policy fulfills the required conditions, the insurer pays the maturity benefit as per the policy document.
Suppose you buy a term plan with return of premium for 30 years and pay a premium of ₹25,000 per year throughout the entire policy term.
Your total premium amount over 30 years will be:
₹25,000 × 30 = ₹7,50,000
In case the policy provides a return of all your eligible premiums, you can get ₹7,50,000 upon maturity of the policy.
Please note that the actual maturity benefit will vary across insurers and plans. The above calculation is just for illustration purposes only. It does not take into consideration any taxes or other charges which might be deducted from the refund.
Which Premiums May Be Refunded?
Return of premiums usually covers the eligible premiums which have been listed under the policy. This is crucial because one should not assume that all premiums which have been paid will be returned. This depends on various factors.
For instance, some refundable premiums may comprise:
- Base Policy Premiums: These are the premiums for the basic policy cover if it qualifies to receive refunds as per the policy.
- Other Premiums: Any other premiums paid to the company due to optional riders do not count in receiving refunds.
- Taxes/GST: These premiums and other statutory charges may not count in the maturity benefit.
- Extra Premiums: This refers to other premiums charged as a result of some underwriting consideration.
Always inquire how an insurer defines total premiums paid or return of premium at the time of buying the product.
It is also crucial to note that receiving the premiums does not mean you are receiving financial gains because of inflation.
Exclusions and Limitations to Know
Even though a return-of-premium term plan has a maturity benefit, there are some exclusions and limitations that may impact the amount to be paid out or eligibility.
Policy cancellation or lapse: In case you stop paying premiums and the policy lapses, you may not get the entire maturity benefit. Any surrender or discontinuance benefit would depend on the terms of the policy.
Rider premiums: Any premiums that you pay for rider benefits such as accidental death or critical illness rider may not be included in the refund.
Taxes and other charges: There may be some exclusions of taxes, levies, and any other amounts as specified by the insurer from the refundable premium.
Surrendering: If you surrender the policy before maturity, you may not get back more than the premiums paid or nothing at all, depending on the product’s terms.
Policy exclusions: Death benefits and other insurance claims are still subject to the policy exclusions and limitations. This is because life insurance policies have some provisions related to suicide within the exclusion period.
These provisions would vary with the product. Be sure to go through the policy wording, benefit illustration, exclusions, and surrender provisions before buying policy.
Requirements to Avail Maturity Benefit
In order to avail the maturity benefit under the term plan with return of premium, one must meet the conditions as per their policy document.
Here are some important conditions that one needs to know before buying a policy.
Surviving through the whole policy term
The insured individual should be alive till the time when the policy reaches its maturity. The insurer will pay the respective death benefit to the nominee if the insured person dies during the policy tenure.
Keep the policy in force
One needs to fulfill the payment conditions as per the policy. Missing premium payment might have an impact on one’s coverage and eligibility for maturity benefit, depending on the grace period and other clauses in the policy.
Pay the due premium amount
There are certain policies where all the premiums need to be paid by the time when the maturity benefit is paid out. One needs to see whether the selected plan offers any other benefit if the policy gets paid up or the premium is stopped before the completion of the policy tenure.
Apply for the maturity claim according to the procedure laid down by the insurer
You may be required by the insurer to fill out a maturity claim form along with some documents such as proof of your identity, your bank details, and the policy document itself.
Review the terms of your policy
The amount payable at maturity and conditions related to it depend upon the individual insurance plan.
Tax on Term Plan with Return of Premium
Taxation is one more factor that needs to be taken into consideration while analyzing a term plan with return of premium in India. The premiums paid and maturity benefit can both be eligible for tax deductions, but the relevant criteria should be known.
Tax on Premium Payments
Premium payments for life insurance plans can be eligible for deduction under Section 80C of the Income-tax Act, 1961, depending on the relevant conditions and deduction limit. Such deduction is usually available in case of the old tax regime, not the new tax regime.
The maximum deduction amount can also depend on the sum assured and date of issuance of the plan.
Please check your eligibility and chosen tax regime before claiming such deduction.
Is the Maturity Benefit Tax-Free?
The maturity benefit under a return-of-premium term plan can be exempted from tax according to Section 10(10D) of the Income-tax Act, 1961.
In respect of non-ULIP life insurance policies issued on or after 1 April 2023, the exemption may not be available where the premium to be paid exceeds ₹5 lakh in any relevant year. In cases where a person has more than one eligible policies issued on or after this date, aggregate premium rules may apply. Others exemptions criteria will need to be taken into account as well, including the premium-to-sum assured criteria.
For instance, in case your policy is exempted from tax, the maturity value may be tax-free. Nevertheless, if it fails to meet the requirements set forth by law, then the payment will be subject to taxes according to the respective law.
Conclusion
A term plan with return of premium provides both life insurance coverage and a maturity benefit in case of surviving the term of the policy. In case of fulfilling other conditions of the policy, it will attract people who want their premiums returned rather than have no maturity value in case of a term plan.
However, just because there is a premium refund does not mean that the insurance policy is a good choice. The premiums may be higher than those for an equivalent pure term policy, and inflation will make the refunded amount less valuable many years down the line.
Before coming to a conclusion, compare the premiums, coverage, maturity value, exclusions, and taxes on both types of insurance policies. Think about how you can use the money saved through a regular term policy towards meeting your financial objectives.
In the end, select an insurance policy that provides enough financial protection to your family while at the same time being affordable to pay for.
