Buy zero-cost term plan if you are keen on a return, say experts

If not, stick to a plain-vanilla plan and invest the surplus in mutual funds

Two types of term insurance plans have been available in the market so far. One is the plain-vanilla plan where if a person dies during the policy term, his nominee gets the sum assured. If he survives, he gets nothing. The second is the return-of-premium (RoP) term plan. The essential difference between these plans is that in the latter, if the insured survives the policy term, he gets back all the premiums he has paid. RoP plans are about twice as expensive as pure term plans. 

Now, two players—Max Life Insurance (Smart Secure Plus Plan) and Bajaj Allianz Life Insurance (eTouch Term Insurance Plan)—are offering a third variant which the industry refers to as zero-cost term plans. Two or three more insurers are expected to launch these plans within the next couple of months.

How they work

Max Life calls this feature ‘special exit value’ and offers it with its Smart Secure Plus Plan. “The policyholder has a one-time option to exit at a specified point and receive all the premiums paid for the base protection benefit. This option is provided to those policyholders who don’t avail of the RoP variant in the Smart Secure Plus Plan,” says Vaibhav Kumar, head-products management, Max Life Insurance.  

According to Sajja Praveen Chowdary, business head, term insurance, Policybazaar.com, “This feature is only available if you buy a cover with a long policy term of 35 or 40 years, not if the term is 10-15 years.”

In the case of Max Life Insurance, this feature is available if the policy term is 40 years or above. For policy terms of 40 to 44 years, the policyholder can choose to exit in the 25th policy year or at the age of 65, whichever is earlier. If the policy term is 45 years and above, the policyholder can exit in the 30th policy year or at the age of 65, whichever is earlier.

Get your money back 

These policies are targeted at people who don’t buy term insurance because there is no payout on surviving the policy term. “If such customers exercise the exit option in these plans, they become zero-cost plans for them,” says Chowdary. 

According to Avdhesh Gupta, appointed actuary, Bajaj Allianz Life Insurance, “At the time of buying the policy, the customer may feel he needs a term cover till the age of 75 or 80. But later he may not want to continue with the cover. So, we have provided flexibility in our term cover which allows the customer to end the cover, with the added benefit that he gets all the premiums back.” 

Should you buy?

Financial planners favour the plain-vanilla term plan. “Go for a low-cost, online term cover till the age of 60 to meet your insurance requirement. If by, say, 55, you feel you have met all your financial obligations, or have accumulated sufficient wealth to meet them, discontinue the term plan,” says Melvin Joseph, founder, Finvin Financial Planners. 

According to him, any term plan that offers money back, will be more expensive. “Customers must also understand the concept of time value of money,” he adds.  Zero-cost term plans, while less expensive than RoP plans, are 28-35 per cent costlier than plain-vanilla term plans from the same company. 

According to Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India-registered investment advisor, “A customer can buy a low-cost term plan and invest the difference—between the premium of the pure term plan and that of the zero-cost term plan—in a low-cost index fund and he will have just as much (the total of the premiums paid) or more after, say, 40 years.”

Pure term plans are lighter on the pocket. This makes it easier for the insured to continue with them during times of stress.  “Many customers also look at the premium and settle for the cover their pocket allows. A lower-cost plan will allow them to buy a larger cover and hence be better protected,” says Raghaw.

Some customers buy a term plan with a longer tenure (even though they are more expensive) for estate planning. If they pass away before the tenure ends, their nominees get the sum assured. Surrendering the term plan prematurely won’t serve the purpose of such customers.  A zero-cost variant can be useful under certain circumstances.

“Even if these plans are more expensive, they can serve a purpose if they are able to incentivise customers, who are hung up on getting a return, to buy a term plan,” he says.