For the quintessential Indian investor who buys loads of Life Insurance, but for all the incorrect reasons, there’s a rather gimmicky policy type known as “TROP” or “Term with Return of Premiums”. TROP is a variant of the “Pure Term” life insurance.
Pure Term is the most distilled, low cost and high utility type of life insurance; providing the insured person with a death benefit for a fixed period of time, and nothing else. What often discourages policy buyers from purchasing term plans is the fact that there’s no pot of gold at the end of the rainbow, that is, term plans do not pay you anything as a maturity benefit. The entire quantum of premiums paid gets consumed as an expense.
TROP’s arrived on the scene as an ostensible solution to this “problem”, that is – at the end of the term, they pay you back your premiums paid (minus the taxes). And while this would’ve been great if the annual premium payable under a TROP was the same as a pure term plan, this is obviously not the case. When it comes to life insurance, there are no free lunches!
As it turns out, a TROP is between two and four times as expensive as a pure term plan. That is, if you need to pay Rs 8,000 per year to achieve a life cover of Rs. 1 crore with a pure term plan, you’ll have to shell out between Rs 16,000 and Rs 32,000 per annum to achieve the same cover with a TROP. The exact figure is contingent upon quite a few factors: the policy term, your age, and the life insurer in question, to name a few.
As a thumb rule: the shorter the policy term, the higher the incremental premium payable to achieve the same cover with a TROP. For a 20-year term versus TROP, the premium differential is likely to be around 2X. For a 10-year term versus TROP for the same individual, the premium differential is likely to be closer to 4X for some policies.
In effect, the “price” of getting your money back is between one and three times cost of actually achieving the actual life cover. Does this make sense from a Financial Planning standpoint? Let’s probe with a simple example of a 30-year old male.
The cost of achieving a 1 crore cover for 20 years for the person in question would most likely be close to Rs 8,000 per annum (inclusive of service tax). A 20-year TROP will entail paying a premium of anything from Rs. 20,000 to Rs. 25,000, varying from one insurer to another.
Under the pure term plan, the individual would pay a total of Rs. 1.6 lakhs over 20 years; and receive nothing at the end. For the TROP, the individual would pay a total of Rs. 4.6 lakhs or so over 20 years, and receive the tax-deducted amount of Rs. 4 lakhs at the end as a “return of premium”.
Had the individual invested the differential (in this case, Rs. 15,000 per annum) in a Mutual Fund SIP (Rs 1,250 per month), he would’ve ended up accumulating an impressive sum of Rs. 12.4 lakh over 20 years, assuming a long-term growth rate of 12 per cent per annum.
What about the 10-year TROP? The premium differential is likely to be a lot more: closer to Rs. 25,000 per annum. Broken down monthly and invested at a projected return of 12 per cent per annum, this would grow to roughly Rs. 4.6 lakh in ten years. Under the TROP, the premium returned at the end would amount to roughly Rs 3 lakh, after deducting taxes paid; a difference of roughly one and a half times.
Under both scenarios, you’ll find that it’s far wiser to opt for a pure term plan, and invest the cost differential judiciously. For longer term plans, the “price” paid for receiving your premiums back balloons significantly.
If you must go against common sense and choose a TROP, make sure you don’t opt for a term exceeding ten years. The compounding-led growth potential you’ll be sacrificing between years ten and twenty could be more than you can imagine.
