Why you shouldn’t buy insurance policies returning your premiums:Watch out, such insurance plans come with a cost – all details inside

Many buyers hesitate to purchase term insurance because they dislike the idea of getting nothing back if they survive the policy term. To overcome this hesitation, insurance companies have started offering Term Plan with Return of Premium (TROP) plans. Recently, Aviva India launched one such plan that promises a 100% premium refund upon survival, subject to certain conditions. However, industry experts warn that these plans come at a very high cost. Varun Agarwal, Head of Term Insurance at Policybazaar, points out that the high premium is the biggest drawback of these plans. Buy Pure Term, Invest the Savings According to Meenu Mantri, EVP at Anand Rathi Share Stock Brokers, the premium for a TROP plan can be 2 to 3 times higher than a pure term plan for the same cover and tenure. “If you invest this extra premium amount in a Systematic Investment Plan (SIP) or a Recurring Deposit (RD), you can accumulate a similar or even larger amount of wealth,” Mantri explains. 4 Things to Consider Before Buying a TROP Plan Before opting for a return-of-premium plan, keep these four factors in mind: Apple-to-Apple Comparison: Compare the TROP plan with a pure term plan that has the exact same cover, policy term, premium payment term, and payment frequency. Check the Insurer’s Track Record: Vaibhav Kumar of Max Life Insurance advises checking the company’s Claim Settlement Ratio (CSR) and verifying if the premium paid for riders (add-on covers) is also refundable. Read the Fine Print: Carefully check the exclusions (what is not covered), waiting periods, and the surrender schedule. Calculate the actual annual return (IRR) on the maturity amount. No Extra Refund on Death: In the event of the policyholder’s death, the nominee only receives the Sum Assured. The premiums paid are not refunded additionally. Exiting Early Leads to Heavy Losses Under the rules effective from October 1, 2024, policyholders are eligible for a Special Surrender Value after completing one year. However, this surrender value is often much lower than the total premiums paid. After 3 years: You get only 30% to 35% of the paid premiums. After 5 years: You get 50% to 65%. After 10 years or more: You get 80% to 90%. Varun Agarwal warns that if a policy lapses, you may not get any refund at all. “Whether you choose a pure term plan or a TROP plan, surrendering early is always expensive. It is better to buy an affordable pure term plan so that you can easily continue paying the premiums without defaulting,” he says. The Inflation Trap: ₹100 Today Will Be Worth Just ₹37 in 20 Years Renu Maheshwari, a SEBI-registered investment advisor, highlights how inflation eats into your returns. Even at a moderate inflation rate of 5% per year, the purchasing power of ₹100 today will shrink significantly: In 20 years: Worth just ₹37 In 30 years: Worth just ₹23 If inflation averages 7% per year, ₹100 today will be worth just Rs 25 in 20 years. Maheshwari notes that the Internal Rate of Return (IRR) on the extra premium paid for TROP plans is only about 4.5% to 5.5%. Therefore, the real value of the refunded premium at maturity will be extremely low. Cost Comparison: Pure Term vs. TROP Example: A 30-year-old individual buying a ₹1 Crore life cover for a 40-year term. The Bottom Line Insurance should be bought strictly for financial protection, not as an investment tool. To grow your savings, look at wealth-creation instruments like Mutual Funds or the Public Provident Fund (PPF). A return-of-premium plan is only suitable for those who absolutely insist on getting a lump sum back at maturity. However, make sure that the high premium of a TROP plan does not force you to settle for a lower life cover than you actually need.