Return of Premium Rider: Is it worth getting it?

Premium Rider

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Term life insurance, as the name implies, covers you for a set number of years, such as 10, 20, or 30. If you die within the period of your insurance, the sum assured (death benefit) is paid to the beneficiary or beneficiaries you specify in the policy. If you prevail over the policy’s term, your coverage will simply terminate.

So a term insurance plan will protect the family if the given policyholder dies between the age of 65 and 70. However, what happens if the policyholder survives the plan but dies at, say, the age of 71? Doesn’t all of the premiums the policyholder paid go to waste? Potential policyholders when considering purchasing a 1 crore term insurance usually have this question. However, there is an answer to your question: Return of Premium.

When you purchase a return of premium rider or return of premium life insurance, the insurance company will refund your premiums if you outlast the term. However, this flexibility comes at an additional expense. So, is it worthwhile? The Return of Premium Rider/ insurance policies contain a few clauses, limits, and limitations that you should be aware of before purchasing. Let’s look closely at them:

What is the return on premium riders in term insurance policies?

As the name implies, the Return of Premium Rider in Term Insurance extends the unique advantage of reimbursing the insured’s accrued premium paid to date on their term insurance policy. However, there are two things you should be aware of regarding Return of Premium Riders (ROP):

  • The ‘Return of premium’ is only provided to the insured if he or she survives the policy term.
  • The premium reimbursed is a total of the base premiums paid, but this does not include the GST or the rider premiums.

Let us explain this with an example: XYZ bought a 1 crore term insurance insurance policy when he was 25 years old and a Return of premium rider. S/he is a non-smoker and has chosen coverage of ₹2 crores until they turn 60. Their annual premium ranges from ₹15k to ₹20k (including GST) for the base plan, plus rider charges. S/he survived the policy tenure because of his healthy lifestyle, risk-free activities and frequent health check-ups. As stated by the insurer, their Return of Premium rider kicks in, and their whole premium (minus GST and ROP charges) is refunded as a benefit of purchasing a term insurance plan and surviving the tenure.

Consider the Costs and Benefits:A Return of Premium Rider 

Let’s look at the potential benefits and expenses of including a return of premium rider in your 1 crore term insurance life insurance policy in India.

  1. Scenario:

Ravi, a 37-year-old non-smoker from India, is considering a 30-year term life insurance policy for ₹25 lakhs with monthly payments of ₹5,620. He is considering ‘Return of premium rider’, but it will cost ₹8,800 per year, which is a difference of ₹3,180 yearly.

  1. Breakdown of costs:

Without a rider: Total premium paid over 30 years: ₹1,68,600.

With the rider: Total premium paid over 30 years: ₹2,64,000

Is it worth paying an additional ₹95,400 over 30 years for a guaranteed return on premiums?

  1. Opportunity Cost: Investing the difference

The answer is determined by how much Ravi could potentially earn if he invested the additional premium amount instead. This is known as opportunity cost.

For example, if Ravi invests an additional ₹3,180 annually in a Mutual Fund (ELSS) within a tax-saving scheme like PPF, it may increase to almost ₹4 Lakhs in 30 years, assuming an 8% annual growth rate. In this case, investing the difference is likely to be more beneficial than the premium rider’s return.

Important considerations:

  • Ravi’s risk tolerance plays an important influence. Investing in stocks involves more risk than a guaranteed return from the rider.
  • Tax benefits from investment choices such as PPF should be considered.
  • A good investment strategy requires consistent investments over a 30-year period.
  1. Alternatives for Lower Risk Takers: 

Ravi might invest the additional premium in fixed deposits (FDs) with a 5% interest rate. Even after taxes, this might increase to roughly ₹2 lakhs in 30 years. In this situation, the return of a premium rider may be a more appealing option, as it guarantees a return of his entire payment.

The decision is based on Ravi’s unique circumstances. Consider your level of risk tolerance, investment objectives, and tax situation before deciding between a premium return rider/ Insurance and investing the difference.

What are the benefits and cons of opting for term insurance with riders?

Benefits:

Financial returns are guaranteed: While many forms of life insurance products, such as ULIPs and Endowment plans, provide a guaranteed return, 1 crore term insurance insurance plans do not. A Return of Premium rider in term insurance provides guaranteed returns if the policyholder lives the plan’s tenure. If the policyholder dies while the plan is in effect, the death benefit is transferred to the beneficiaries.

Tax benefits: The premiums paid for the Return of Premium rider in term insurance are eligible for the tax benefits provided by Section 10(10D).

Cons

High premiums: Return of Premiums rider guarantees a payout, and insurers bear a financial risk. Term insurance companies require you to pay a significantly higher premium. This contradicts the fundamental advantage of term insurance plans which is affordability.

Multiple conditions: Since the Return of Premium riders in term insurance policies provides a guaranteed return, term insurers apply a set of restrictions and conditions. Only after these conditions have been met by the policyholder can the Return of Premium benefit be accessed and utilized. Given that term insurance companies already have a tight list of eligibility requirements, these extra constraints would be a significant barrier.

Inflation remains unaccounted for: The insurance premiums thus repaid are not adjusted for the current inflation rate. As a result, the actual value of the premiums reimbursed decreases over time.

Chance of lower death benefits: Including Return of Premium Riders in term insurance significantly increases the premium. This may encourage prospective policyholders to choose a lower coverage amount in order to get lower rates. Now, the major goal of 1 crore term insurance insurance is to function as an income replacement and ensure that your family’s life-stage goals are met smoothly and without financial difficulties. If you choose a smaller coverage amount, you negate the point of getting a term insurance policy.

So we are saying,

When you choose a term insurance rider, you must carefully examine the benefits and cons and compare premiums to determine whether the purchase is worthwhile for the benefit it provides. Unfortunately, the benefits of Return of Premium Riders in term insurance policies are insufficient to offset the drawbacks. As a result, the rider is rarely suggested if you want an economical and profitable term insurance policy.

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