Difference Between Pure Term Plan and Term Plan with Return of Premium
When Priya’s parents retired, she felt reassured knowing they had invested in term insurance plans for many years. The thought of unexpected financial hardships due to the loss of a parent did not worry her, as she knew their insurance coverage would provide support. However, when her parents decided to terminate their term insurance and withdraw their funds, they were shocked to learn that their policy did not offer a refund. This incident prompted her to delve deeper into term insurance plans. She encountered two main types of term plans: pure term plans and term plans with a return on premium. Keep reading to understand the differences between these two types of term insurance plans and choose the one that best suits your needs.
Learn more: Why Buying Life Insurance Online Makes Financial Sense
What is a Pure Term Plan?
Pure-term insurance is a type of life insurance policy that provides coverage for a specific period of time. If the policyholder passes away during this time, the nominee receives a death benefit. However, no survival benefits are attached to this type of term insurance. This means that if the insured lives beyond the policy term, they would not receive any maturity benefits.
What is a Term Plan with Return of Premium?
In a term plan with a return of premium, the policyholder receives back the entire premium paid (excluding GST) at the end of the policy term. This variant of term insurance provides survival benefits, ensuring that the policyholder gets back the premium they paid to the insurance company.
Learn more: 8 Ways to Find Life Insurance Policy Documents of Deceased Person
Difference Between Pure Term Plan and Term Plan with Return of Premium
Here is a table giving a comparison of the differences between pure term insurance plans and term insurance with return of premium:
Parameters
Pure Term Plan
Term Plan with Return of Premium
Survival or Maturity Benefit
No payback of premiums if the policyholder survives the term.
Provides survival benefit, including refunding all premiums paid during the policy term and accrued bonus, if any.
Surrender Value
Benefits and coverage cease immediately if surrendered, and no refunds are provided.
Surrendering the policy results in cessation of policy cover, with only a small fraction of the premium paid refunded.
Tax Exemption Benefits
Premiums paid are eligible for tax deductions as per Section 80C of the Income Tax Act. The death benefit in 10(10D) of the Income Tax Act is non-taxable. Furthermore, premiums for critical illness riders are also subject to tax section 80D.
All tax benefits related to pure term insurance plans are applicable. Moreover, other benefits, such as maturity or survivorship, will also be tax-exempt.
Returnable
Policy ends when premium payments cease.
Policyholders have the right to terminate a policy and get back the premium paid at that date, subject to deductions. They should define deductible limits with the insurer in advance.
Continued Protection
If premium payments stop, policy lapses and benefits are forfeited.
Even if premium payments stop, the policy remains in effect, but benefits may be reduced.
Advantages
Premiums are significantly lower compared to other types of insurance.
A term plan with return of premium provides closure of benefits: either death if the insured passes away or maturity if the insured survives the term of the policy.
Disadvantages
The premium rates increase with time as long as the insured is alive. Upon death, the policy terminates without pay.
Even though the premium is higher, it is much lower than a whole-life policy. Moreover, the higher the premium as the insured gets aged. It may provide the return of all the premiums paid. However, the amount will not be much compared to the returns from other investment options.
Before deciding to buy term insurance online and of what type, consider analysing the insurance market, your financial situation, needs, and other relevant factors discussed above. A term insurance plan with a return-of-premium plan offers survival benefits, a feature lacking in regular term insurance policies. However, it generally has higher premiums than regular term insurance policies.
Suresh KP is the Founder of Myinvestmentideas. He is NISM Certified – Investment Adviser and NISM Certified – Research Analyst. He has been analyzing financial markets in the last 20 years.He can be reached at suresh@myinvestmentideas.com Latest posts by Suresh KP (see all)
