Did you know that there is a new type of term insurance plan that might cost you nothing? It might seem exciting, but having a thorough study of the same is important before you take the plunge. Continue reading to learn more about these plans and whether they are truly zero-cost programs. 

Understanding the Difference Between a Regular Term Plan and Versus Zero-Cost Term Plan

If the policyholder unfortunately dies within the policy’s term, the sum assured is paid to his or her nominee. If the policyholder lives out the tenure, no maturity amount is paid. That’s the case with classic term insurance plans. Another option is a return of premium term plan, which returns the policyholder for all premiums paid if s/he lives the policy term and provided they have paid all premiums on time.

In a zero cost term insurance plan, the policy bearer has the option to terminate the plan at a particular age and get all premiums paid minus GST. 

Should you take it?

Under zero-cost term insurance, if the policyholder believes that all liabilities have been met around retirement age and no longer requires term insurance, he or she will receive a refund of the premium paid minus GST. 

Zero-cost term insurance plans are aimed at customers who buy insurance only for a return.

According to industry experts, zero-cost term insurance policies are aimed at clients who are concerned that if nothing unpleasant happens, the premium they have paid for the standard term insurance plans will be wasted. If the policyholder chooses the exit option, these policies become zero-cost for them.

A zero-cost term insurance plan is for individuals who have built enough assets and met all their life goals while still in their fifties, and they may not need life insurance anymore. 

This policy is deliberately designed to encourage those who do not purchase term insurance plans because there is no profit from surviving the policy period. 

Customers who are more cost-conscious and concerned about ‘losing’ the amount paid for term cover at the end of the policy term prefer zero-cost plans. 

Why are These Preferred Over Regular Term Insurance Plans?

Zero-cost term plans allow for leaving before the full term is over: In return for premium term plans, the policyholder must pay the premium until the end of the term and then receive a refund. Zero-cost term insurance allows policyholders to terminate the plan when they reach a particular age and have no liabilities.

Long-term continuity is required before the exit is allowed: Zero-cost term insurance policies typically have a long policy duration of 35 to 40 years. The exit option is available if the policy term exceeds 40 years. If the insurance term is between 40 and 44 years, the policyholder will have the option to exit in the 25th policy year or at the age of 65, whichever comes first, according to the policy agreement. For insurance terms of 45 years or more, the policyholder may exit in the 30th policy year or at the age of 65, whichever occurs first.

Key Points to Keep in Mind

The additional amount you pay for zero-cost term insurance: The return of premium plans may cost twice as much as standard term insurance plans. Zero-cost term plans have a lower return than premium plans. However, they are often 25–35 percent more expensive than regular term insurance plans.

So, is it a gimmick, or does it actually come with a zero cost?

To begin, it is important to note that ‘zero-cost’ insurance does not exist. All term insurance plans come with a cost, whether it is a pure term plan, a premium refund, or another form of policy.

Customers should be aware that, while they will receive their premiums back, they will lose any interest they may have earned on the additional premium over the 20-25 years of the plan, which is the ‘cost’ associated with this type of plan. 

Understand the above scenario through this example: 

A regular term policy for a 30-year-old that protects him for Rs 1 crore over 30 years typically costs roughly Rs 12,000 per year. On the other hand, zero-cost term insurance for the same duration can cost roughly Rs 15,500 each year. So, if he gets a zero-cost term insurance plan, he will likely spend an additional Rs 3,500 per year for 30 to 40 years. A conventional term plan will typically cost him Rs 3,60,000 if he continues it until the age of 60.

If he chooses a zero-cost term plan and exists after 30 years, the insurer is expected to refund roughly Rs 4,65,000 (Rs 15,500 x 30) — the GST amount. Instead of purchasing a zero-cost plan, he can typically earn around Rs 5.75 lakh after 30 years by purchasing a traditional term insurance plan and investing the additional premium of Rs 3,500 (zero-cost insurance premium — term insurance premium) in an equity mutual fund Systematic Investment Plan (SIP) that pays 10% interest per year. So, if he invests the additional premium, he can establish a corpus equal to or greater than the premium return he receives at the exit.

Many industry experts prefer pure-term insurance plans over variants. In a pure-term plan, no premiums are returned at maturity, but the premium required to pay for the same sum assured is fairly low. In the event of unfortunate death, the treatment is the same for both: payment of the cover sum insured.”

Conclusion

Purchasing a pure-term insurance plan is always a wise decision for financial security. It is preferable to invest your excess funds rather than trying to recoup them after paying an additional premium for an extended length of time.

Published By: Aize Perez