What it is
A return of premium term plan is a form of life insurance that is sold as a term plan with a feature that gives back premiums in certain situations. The exact conditions are set out in each insurer’s policy document, so read that document before comparing plans.
To judge any such plan, it helps to start with what life insurance does. The Insurance Regulatory and Development Authority of India (IRDAI) describes it as a financial cover for a contingency linked with human life, such as death, disability, accident or retirement.
When a person dies or becomes disabled, the household loses income. Life insurance is meant to soften that loss.
How it works
The core idea is the sum assured: the amount the insurer guarantees to pay if the insured event happens. IRDAI says this amount is a benefit. It is not a price tag on a human life, which it says cannot be valued, but a sum worked out from the income the family would lose in future years.
According to IRDAI, life insurance products pay a definite amount if the person insured dies during the term of the policy, or becomes disabled because of an accident. The term is the period for which the policy runs.
IRDAI frames the risks as two: dying too soon and living too long. Protection products address the first. Savings and retirement-income products address the second. A plan that mixes protection with a return of money paid sits between the two ideas, so it is worth checking which part you are paying for.
What it means for you
Who needs cover
IRDAI says that anyone who earns and has a family to support needs life insurance. It adds that housewives need cover too, given the economic value of their contribution, and that even children can be considered because their future income potential is at risk.
How much cover
IRDAI lists these factors for deciding the amount:
- How many dependants you have
- The lifestyle you want to provide for your family
- How much you need for your children’s education
- Your investment needs
- What you can afford
IRDAI suggests getting help from an insurance agent or broker to understand your needs and the right type of cover.
What to check when comparing plans
- The sum assured and the term of the policy.
- The events covered, such as death, or disability from an accident.
- Whether any premiums are returned, and under what conditions.
- The premium you will pay each year, compared with a plain term plan for the same cover.
You can also use our compound interest calculator to see what a premium amount could grow to if kept in a savings product, as one way to weigh the difference in cost. The result is only an illustration and not a forecast of any plan’s outcome.
Common mistakes to avoid
- Choosing the cover amount by what feels comfortable rather than by dependants, education needs and affordability, the factors IRDAI lists.
- Assuming a plan covers every event. Check what is covered and what is not.
- Comparing plans on premium alone without comparing the sum assured and term.
