Zero-cost term insurance policy: Do benefits outweigh the costs?

Generally, a term plan provides protection during the tenure of the policy but there is no money back if you outlive the policy. Zero-cost term insurance plans return the premiums paid but come with strict exit conditions. For example, Max Life’s zero cost term plan, Smart Secure Plus, is only available if you opt for 40 policy years or more. It means that a 30-year-old will have to buy a term plan that covers up to the age of 70. For HDFC Life, it is 36 policy years. In case of ICICI Prudence, it is available till the age of 55 years for those in the age group of 18-34 years and 31 years policy for those who are 35 years of age and above.

To be sure, return of premium in zero term plans is different from ‘term return of premium plans’ (TROP) which have been around for a long time. This is also a type of term insurance plan where the insurer returns the amount of premium paid by the policy holders over the years if they outlive the policy. But the premiums are almost double that of a regular term plan.

“TROP comes at a premium of 2.5 times more than a pure term plan. However, in the zero term plan, there will be a special one-time exit option where we will return all the premiums paid so far if you buy a long-term policy. If you don’t surrender it during the exit window, the policy will lapse under the original tenure without returning any premium,” says Vaibhav Kumar, head of product management at Max Life Insurance.

Hidden costs?

Financial planners point out the disadvantages of the zero cost term plan. The tenure is longer than most individuals need. And no money is given if you continue the policy till maturity after exercising the retirement option.

Despite this, many people have recently been opting for higher policy tenures in term plans. “We conducted a consumer survey in 2021 which showed that the average policy tenure in term plans had increased from 25-30 policy years to 35-40 years in the last 3-4 years. This led us to launch an updated term plan with a special exit option so that people who bought a long term plan would want to terminate it, get to close the policy and at the same time get some benefit from it. If they don’t opt ​​for it, the cover will last till the original policy tenure,” says Kumar.

So, if a 35-year-old man wants to avail Max Life nil option, he will have to go for a 40-year policy term plan, that is, cover till the age of 75. It will be the retirement option . available after 25 policy years, that is, at the age of 60 years. This policy will come at a premium ₹25,953 for ₹1 crore cover and premium payment term of 25 years, data available from insurance advisory platform Ditto says. However, if the policyholder is sure that he only needs the policy till he reaches the age of 60, he can go for a shorter policy period. Terminology plan of ₹1 crore coverage will come after 25 policy years with a ₹14,440 annual premium. It basically means you are paying ₹11,153 (25,953-14,440) more to take advantage of the ‘special retirement’ option at the age of 60. If you take advantage of it, you will get it ₹5.25 lakh at the time of retirement though you would have been paid ₹6.48 lakh so far. This is because the insurance company does not refund the amount of GST, or goods and services tax, on annual premiums. Quite interesting, if you simply buy a term plan for ₹14,440 and invest more ₹11,153 in an equity mutual fund, assuming a CAGR of 10% (compound annual growth rate), you will accumulate ₹12.45 lakhs

“Although the difference in premium for young people will not be large in terms of total money, those in the age group of 35 years and above should avoid a zero term plan and aim for more cover. More coverage till age 55-60 is more prudent than taking less coverage for age 75-85,” says Nishant Batra, chief goal planner at Holistic Prime Wealth, a financial planning firm.

Why buy zero-cost plans

The idea that you get nothing if you live through the policy term puts people off buying a term plan in the first place. Instead they opt for investment linked insurance plans where the life cover is minimal. Insurance consultants say it is difficult to convince people to buy a pure term policy; the zero cost option helps to increase penetration. They believe that it may not be better than a pure term plan, but at least it is much better than TROP, endowment policies or no cover at all.

Who should consider zero term plans? “People who are initially unsure about the policy tenure or the financial dependencies on their income can consider such plans,” says Manju Dhake, VP-Insurance at 1Finance, a financial advisory firm. married with children can buy a long-term plan that gives them a special retirement window at an appropriate age.

Take a mint: A zero-term plan creates a smart sales pitch. Choose it only if you need a term plan for longer policy years. Note that a longer policy tenure comes with a higher premium for comprehensive insurance coverage. Don’t compromise the coverage of the policy just to avail the zero cost option. Experts advise against going for a low-premium low-coverage term plan with longer policy years.