Why zero-cost term insurance is making a buzz
5 min read . Updated: 12 Jan 2023, 02:27 AM IST
PremiumIn a zero-cost term plan, the sum assured is paid to the nominee on the death of the policyholder but it offers a special exit feature.
The insurance sector is suddenly abuzz with news of a new term life plan. Known as the zero-cost term plan, it is the latest addition to two other term plans offered by various insurers. However, policyholders need to know how this plan differs from the regular term plan and the return of the premium term plan (TROP) before they buy this policy.
Under a regular or pure term plan, if the policyholder dies when the policy is in force, the nominee mentioned in the policy will get the sum assured. In contrast, insurers do not pay any maturity amount if the policyholder survives beyond the tenure of the policy. Under TROP, the nominee gets the sum assured if the policyholder dies during the policy term. Even if the policyholder survives the term, he gets back the sum of all premiums paid (excluding the goods and service tax, or GST).
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In a zero-cost term plan, the sum assured is paid to the nominee on the death of the policyholder. However, this term plan offers you a special exit feature. You can surrender the policy before or after retirement and get back all the premiums paid against the base cover before the policy expires.
Sanjiv Bajaj, joint chairman and managing director, Bajaj Capital, said, “TROP option only returns your premiums at the end of the policy term. So, in a 35-year term plan, you only get your premiums (excluding GST) back at the end of the 35th year. With a zero-cost insurance term plan, the policyholder can exit before the policy term ends and get back the premiums. Moreover, TROP premiums are significantly higher than standard term premiums. Premiums for the TROP option can be twice as high."
Rhishabh Garg, head of term life insurance, Policybazaar.com, said, “On surrendering the policy at the time of retirement, the policyholder gets back all the paid premiums (excluding GST), and the life cover expires. This feature comes at no additional cost and is as affordable as the regular term plan."
While the special exit feature doesn’t come with additional cost, you cannot exit from the policy within a year or two after purchase. You will have to continue with the policy for a long time before the exit clause comes into force. For instance, if you purchase a 40-year term plan at 35 years of age, you can only exit from the plan after you turn 60 (if the plan offers special exit feature at retirement); that is, you will have to continue your policy for at least 25 years to make a one-time exit from the plan. Some plans offer special exit feature from 55 years of age. Typically, conditions for exit differ.
Should you go for it?
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Zero-cost term plans available in the market today are charging premiums that are comparable with regular term plans. This may be more of a promotional strategy, but investors can take advantage of this to lock-in their premiums. Experts expect the premiums of zero-cost plans to rise in future and say that it would make them a less attractive option.
Amol Joshi, founder of Plan Rupee Investment Services, said, “It is well-established that insurance is not an investment, but a pure risk cover instrument. The term plan is the cheapest option to cover the risk to life. Pure risk cover premium is significantly lower than buying any term plan variant. The ‘additional’ premium (once premiums rise) is invested, and the proceeds are what you 'get back'. That alone makes it a non-attractive option."
He added, “There are other aspects, too. For instance, you don’t get the GST expense. Besides, term plans are typically in force for several years, sometimes even decades. Getting the ‘same’ amount back after 15-20 years would imply a loss of purchasing power."
Vishal Dhawan, certified financial planner and founder of Plan Ahead Wealth Advisors, said, “It is best to take a pure term insurance instead of zero-cost term insurance where you get a one-time exit option after retirement. It is better to stop paying premiums towards your pure term plan once the liabilities are over. For instance, you can buy a pure term plan as cover for a loan that you have taken. Such a plan will protect your family’s liabilities in the event of your death. You can stop paying the premiums after the loan is pre-paid. Therefore, it is best to invest your money based on your financial goals rather than continuing your insurance plan for a longer period just to get the maturity benefits back."
Piyush Trivedi, joint president – Alternate Channel, Kotak Mahindra Life Insurance Company Ltd., “In zero cost term plan, an exit option is available after a defined tenure but within the overall policy term. Unlike return of premium policies, this plan allows to get refund of premium prior to maturity if the policyholder feels their liabilities are met, there is no financial dependency and they don’t need a life cover any more."
Mahavir Chopra, founder of Beshak.org, said, “People who think they are likely to become financially independent sooner than estimated can consider buying such a policy. At the same time, one needs to understand that by the time this option of early exit opens up, the value of the cumulative premium paid will be minuscule, thanks to inflation. In short, take this feature as a bonus. Don’t make buying decisions just based on this feature."
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