Invest in Term Insurance Policies that Return Premium - or Not?

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Buying a term insurance plan for safeguarding the future of family seems to be a step towards the right direction in life. Over the years, term insurance has become popular due to the introduction of policies online that come with a lower premium amount.

But still, there are people who are expecting returns when they buy term insurance. For this particular segment of people, the insurance companies have introduced ROP plans or Return of Premium Plans.

Now, what are these ‘return of premium’ plans?

They are categorized under term plans, which pay the death benefit in the event of the sudden demise of the policy owner. However, in case the policy owner survives the term of the policy, the insurance provider will return the entire premium to the former.

But, the question is that are these kinds of term plan actually a trap or are beneficial? 

Expected Returns from Risk Coverage

When people make an investment, they generally measure the benefits and returns they will get against the amount they invest. In some of the tools like term insurance policies, the returns are visible after the insured passed away.

However, since there is no return if the insured survives the policy, it makes a lot of people put off their investment decision, especially those who are self-employed.

The term “Free Life Coverage” is being used widely for attracting people to buy term plan with a return of premium. Every person wants to earn more from their investments. This is the reason why insurance providers introduced these return of premium plans.

These term plans are the same as basic term plans except for one thing. These plans offer life coverage to the insured life, in which when the insured passes away, the insurer pays the death benefit or sum assured to the beneficiary(s). However, if the insured outlives the policy term, then they will get the basic premiums from the insurance company.

Some of the insurance companies have moved ahead by offering additional benefits such as permanent total disability benefit, accidental death benefit, critical illness, and various benefits that are added to the policy. The insurance providers have also extended the facilities of limited premium payment for these plans.

Many people who are self-employed have taken a huge liking for this plan because it offers a life cover to the policyholder along with the return of the paid premiums on surviving the term of the policy. Effectively, the ‘return of premium’ plans try to attract the policyholder by creating an all-winning situation for them. While in one case, when the insured passes away, the sum assured or death benefit is paid to the beneficiaries for maintaining their lifestyle or meeting their life objectives, in the other case, if insured life survives the term of the policy, he gets back the basic premiums paid by him as maturity benefits. 

High Amounts of Premium

Till now we have been studying the benefits of these term plans, now let’s see one major downside. Other than the benefits mentioned above, these plans charge a huge amount of premium. The high premium charged on these plans is against the basic principle of term policies. Term insurance is popular for offering a huge amount of sum assured at an economical rate.

For instance, a 30-year old man who does not smoke and is healthy can easily avail of a life insurance cover of AED 500,000 for an insurance premium of around AED 500 per annum for a policy tenure of 40 years. If he buys term insurance online, then the premium maybe even less.

Alternatively, a term plan with ‘return of premium’ might cost around AED 1,300 per annum or even more. Simply put, the man would be spending around AED 800 more than what he would spend on a regular term plan. Moreover, this extra payment would be paid annually for 40 years.

According to the above calculations, an individual would be investing around AED 20,000 for coverage of 40 years on buying a pure term plan. For the ‘return of premium’ term plan, that individual would be investing around AED 52,000, which is AED 32,000 more in a period of 40 years.

If he invests the extra AED 800 in some other investment instrument instead of the ‘return of premium’ plan, he can earn a huge amount of return after the end of 40 years.

Note: These calculations are not accurate and have been done to give you a rough idea about the difference in amounts you will be investing in both the kinds of term policies. 

You may also like this - How does Return-of-Premium Life Insurance Work in the UAE?

Is it Worth Buying or Not?

After looking at the calculations above, it is very easy to conclude that this world does not offer anything extra for free. A smart investment decision is keeping investment and insurance separate from each other.

To fulfill your life coverage requirements, the best option is to buy term plan online (pure term insurance). When you buy a policy online, you can compare different plans that are available from different insurance providers and settle for the one that suits your requirements and budget the most.

You can then invest the remaining available amount in a good investment instrument where you can earn more returns than the amount you paid in the form of premiums under the term insurance plan.

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