One of the biggest impediments to buying a term life insurance policy is its lack of “return”. Therefore the life insurance industry, knowing fully well that term insurance plans are becoming popular, comes up from time to time with innovative term insurance variants. The latest is the zero-cost term insurance plan.
What is zero-cost term insurance? It is a term insurance plan with an exit option. The policyholder can exit the plan at a certain age or after having paid the premiums regularly for a certain number of years. The premiums paid so far, excluding GST, will be returned to the policyholder.
There is no exit option in a normal term plan; if the buyer services the coverage period, nothing is paid out. In a return of premium term plan, the premiums excluding GST, are paid back if the buyer survives the coverage period.
What is the catch? There are two. (1) Typically, only coverage periods of 30-40 years come with this option. (2) More important, such plans are more expensive (typically 20-30%) than plain vanilla term plans. So it is not a zero-cost plan!
It should be obvious to the rational reader that any return of premium arrangement in term life insurance is a terrible idea. We pay more premiums and receive the amount decades later. The money loses value due to inflation resulting in a bigger loss. Had we taken a normal term plan and invested the extra premium, we would end with a neat corpus in future.
But what about the exit option in a zero-cost plan? Is that not useful? No, it is not! The exit option kicks in only decades later. By that time, inflation would have significantly devalued the cost of a normal-term plan, and our income would have also increased, so we might as well let the policy run its course. Exiting after such a long time is of no use.
Unfortunately, many breadwinners delay buying term insurance because they think of it as a loss. Those with such a mindset can consider either the return of a premium plan or zero-cost insurance after abandoning all reason! After all, some term life insurance policy is better than nothing, even though plain vanilla term insurance is always the smartest choice!
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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