Should you buy term Plan with Return of Premium (TROP) or Maturity Benefits: The short answer is “No.”

However, there are rare scenarios where TROP could make sense. Let’s dive into the details to understand why TROP is generally not advisable, but also explore when it might be a viable option.

Term Plan vs. Term Plan with Return of Premium (TROP)

Term Plan

A term plan is a straightforward life insurance policy that provides coverage for a specified period. If the policyholder dies during the term, the sum assured (death benefit) is paid out. However, if the policyholder survives the term, no benefits are paid. In essence, a term plan does not offer any maturity benefits.

Term Plan with Return of Premium (TROP)

This variant works similarly to a standard term plan, with one key difference: if the policyholder survives the term, all premiums paid are returned. If the policyholder dies during the term, the sum assured is paid out as usual.

Why TROP is Generally Not Recommended

Indian consumers often prioritize capital protection, and life insurance companies have capitalized on this by introducing TROP. However, the higher premiums and lower returns make TROP a poor financial choice in most cases. Let’s break it down with an example.

Example: Ajay’s Case

Ajay, a 35-year-old professional, wants to buy a term insurance plan with a sum assured of ₹1 Crore for 25 years (until he turns 60). He’s torn between a pure term plan and a TROP plan. To make an informed decision, Ajay consults a financial planner and compares the premiums of both options.

Premium Comparison

• Standard Term Plan (₹1 Crore, 25 years):
  • ABC Insurance Company: ₹15,457 per year
  • DEF Insurance Company: ₹15,421 per year
  • GHI Insurance Company: ₹12,154 per year

• Term Plan with Return of Premium (₹1 Crore, 25 years):
  • ABC Insurance Company Money Back: ₹26,087 per year
  • DEF Insurance Company Return of Premium: ₹33,404 per year
  • GHI Insurance Company Raksha+: ₹25,812 per year

Two Scenarios: Death vs. Survival

1. If Ajay Dies Before 60

In both cases (standard term plan and TROP), Ajay’s family would receive the sum assured of ₹1 Crore. However, with TROP, Ajay would have paid significantly higher premiums for the same coverage, resulting in a loss.

2. If Ajay Survives Till 60

With TROP, Ajay would receive ₹6,52,175 (₹26,087 x 25 years) at the end of the term. But here’s the catch: he would have paid an additional ₹10,630 per year compared to a standard term plan.

Alternative Investment: If Ajay invested the additional ₹10,630 annually in mutual funds with an expected return of 10%, he could accumulate ₹10.5 Lakhs in 25 years. Even with a conservative return of 8%, he would earn ₹7.8 Lakhs. At 12%, he could earn ₹14 Lakhs—far more than the ₹6.52 Lakhs from TROP.

Other Drawbacks of TROP

• Partial Premium Returns: Some insurers don’t return the full premium paid. They may deduct the initial premium or return only 75% of the total premium.
• Reduced Coverage: If you stop paying premiums midway, your coverage reduces proportionally. For example, if you stop after 5 years in a 25-year policy, your coverage drops to 20% of the sum assured (₹20 Lakhs in this case). While this is better than losing the entire cover (as in a standard term plan), it’s still a drawback.

Rare Scenario Where TROP May Be Beneficial

While TROP is generally not recommended, there are rare scenarios where the premium difference between a standard term plan and TROP is minimal, and the returns from TROP could outperform equity mutual funds with 8% or 10% returns. Let’s explore such a scenario.

Example: Minimal Premium Difference

Rahul, a 30-year-old professional, is considering a term insurance plan with a sum assured of ₹1 Crore for 30 years. He compares the premiums of a standard term plan and a TROP plan from a specific insurer and finds that the premium difference is much smaller than in the previous example.

• Standard Term Plan (₹1 Crore, 30 years):
  • Premium: ₹10,000 per year
• Term Plan with Return of Premium (₹1 Crore, 30 years):
  • Premium: ₹12,000 per year

Premium Difference: ₹2,000 per year (only 20% higher than the standard term plan).

Scenario 1: Rahul Dies Before 60

In both cases, Rahul’s family would receive the sum assured of ₹1 Crore. However, with TROP, Rahul would have paid ₹2,000 extra per year for the same coverage. While this is a loss, the difference is minimal compared to the earlier example.

Scenario 2: Rahul Survives Till 60

If Rahul survives the term, he would receive ₹3,60,000 (₹12,000 x 30 years) from the TROP plan.

Alternative Investment: If Rahul invested the additional ₹2,000 annually in equity mutual funds, here’s what he could potentially earn over 30 years:

• At 10% Returns: ₹2,000 invested annually for 30 years at 10% would grow to ₹3.3 Lakhs.
• At 8% Returns: ₹2,000 invested annually for 30 years at 8% would grow to ₹2.3 Lakhs.

Comparison:

• TROP Return: ₹3,60,000
• Equity Mutual Fund (10%): ₹3.3 Lakhs
• Equity Mutual Fund (8%): ₹2.3 Lakhs

Observation:

• If the mutual fund delivers 10% returns, the returns from TROP are almost identical to the mutual fund investment.
• If the mutual fund delivers 8% returns, the TROP plan actually outperforms the mutual fund investment.

Why TROP Could Be Better in This Scenario

1. Guaranteed Returns: The TROP plan offers guaranteed returns (the full premium paid back), whereas equity mutual funds are subject to market risk. If the mutual fund underperforms (e.g., delivers only 8% returns), the TROP plan would provide better returns.
2. Minimal Premium Difference: Since the premium difference between the standard term plan and TROP is only ₹2,000 per year, the additional cost is relatively low, making the TROP plan more attractive in this specific case.

Conclusion

In most cases, Term Plans with Return of Premium (TROP) are not advisable due to their higher premiums and lower returns compared to standard term plans and alternative investments. However, in rare scenarios where the premium difference is minimal (e.g., 20% or less), and the guaranteed returns from TROP could outperform equity mutual funds with lower returns (e.g., 8%), TROP may be a viable option.

Final Advice:

• Compare Premiums Carefully: If the premium difference between a standard term plan and TROP is minimal, TROP could be worth considering.
• Consider Risk Appetite: If you prefer guaranteed returns over market-linked returns, TROP might be a better fit in such scenarios.
• Evaluate Long-Term Goals: Always assess your long-term financial goals and risk tolerance before making a decision. In most cases, a standard term plan combined with equity investments will still be the better choice.

Bottom Line: Don’t fall for the allure of maturity benefits unless the numbers truly work in your favor. In most cases, pure term plans and investments are the smarter choice.