Sunday, 27 September 2015

Return Of Premium (ROP) Term Insurance Plans

Return of Premium (ROP) scheme is a kind of Term Insurance plan which have features similar to Pure Insurance plan but with additional benefits. Term Insurance Plans do not have any maturity value and benefits are only payable in case of death of the insured. Whereas, in ROP plans the policyholder is not only covered for after death benefits as per the policy, but also on surviving the policy tenure is guaranteed to receive the entire premium amount paid by him/her towards the policy.

Insurers have designed the plan keeping in mind the Individuals who are still inclined towards the Traditional (Endowment) Plans which offer maturity benefits/value if the policyholder survives the tenure of the policy. However, ROP plans are much costlier than Pure Term Insurance Plans and in Financial terms are not regarded as an ideal Insurance or an Investment plans. But still, the fact that it offers maturity value along with after death benefits makes it a viable Insurance Product for many.
In this post I will not discuss the Features and Benefits of the ROP plans as they are identical to Term Insurance Plans and you can read the same in the link provided below.

Thus, in this post I will discuss only the additional benefits provided under the plan and examine the Financial Viability of the Plan.

ROP/Pure Term Insurance Plan/Endowment Plan: How are they different?

ROP only guarantees return of only the premium paid by the insured on surviving the tenure of the term, in addition to the death benefits stated under the policy. Endowment Plan provides the Insured amount along with Additional Bonus and Loyalty Bonus (As per the policy terms) on survival of the policy tenure, and in case of death during the tenure provides the Sum Assured along with accrued bonuses (based on policy terms) to the nominee.
Term Insurance only provides after death benefits and has got no maturity value on surviving the Policy tenure.
Endowment Policy is the most expensive out of the three policies, with Term Insurance being the least expensive policy.  

Benefits Under ROP Plans

ROP Plans depending on the terms and condition of the policy may provide survival benefits in phases, namely midterm and end term. Depending on terms of the policy a certain percentage of Premium may be refunded to the policyholder on completion of half of the tenure, known as Midterm benefit, while the remaining will be paid on successful completion of full tenure ( minus the premium paid back as midterm benefit).
ROP plans may come with the short term payment option as well, meaning, you can pay the premium for 10-15 years (as per policy terms) while the Insurance coverage provided to the policyholder will be for 20-30 years.
ROP also come with “paid up insurance” option in case you default on future premium payments. This means that the policy will continue to be in force despite non payment of premium but the death benefits will be reduced in terms of percentage with regard to the number of premiums paid. On successful completion of the tenure the number of premium amount paid will be returned to the insured. It is only applicable if the policy has been in force for atleast 3 years (5 years in some cases).
In case of surrender/withdrawal from the Plan, the entire premium paid or after deducting certain percentage will be returned to the policyholder as per the terms of the plan.
Premium may be paid on monthly, quarterly, semi-annual or annual basis depending on the option chosen by the policyholder.

Financial Viability of the Plan

If you take Time Value of money into consideration, then, you will find this Plan to be totally ineffective as it does not provide an adequate insurance cover (for the premium levied) nor is it an ideal investment option.
ROP plans are atleast 3-4 times more expensive than pure Term Insurance plans.

Let’s understand the same with the aid of an Illustration:-

Figures are approximation and are subject to changes.

Plan Compare

Max Life Basic Cover (Pure Term Insurance Plan)
Insurance Cover: Rs 25lacs (25 year Plan)
Maturity Value: Nil
Annual Premium: Rs 2,500/- (For 25 years) approx
Total Premium Paid during the Tenure: Rs 50,000/-

Max Premium Return Protection Plan (ROP Term Insurance)

Insurance Cover: Rs 5lacs (25 year Plan)
Maturity Value: Rs 93,500/- approx
Annual Premium: Rs 8,500/- (To be paid for 11 years for 25 years Coverage)
Total Premium Paid during the Tenure: Rs 93,500/-

Plan Analysis

Now let’s understand this,

The Maturity value for ROP is mere Rs 93,500/- which is equivalent to the total premium towards the cover while the insurance cover provided is just 5lacs.
Whereas, in Pure Term plan you get 5 times the cover by paying almost half the premium amount charged under ROP plan.
Thus, the remainder of fund of Rs (8500- 2500=6000) could be invested in other Financial product such as PPF or Equity Mutual Funds. It would provide returns in excess of Rs3 lacs over the 25 year period even if it earns a mediocre return of 8% which is again 3 times more than the maturity value provided under ROP plan.

Hence, I do not find any strong reason to invest in ROP plans. Unless, one is extremely conservative as an investor and is not willing to diversify his/her investment portfolio.

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