Term insurance is a must-have in one's financial portfolio to secure one's dependents financially in one's absence and there are variants of term plan as well as different riders you can add-on to benefit further. And when it comes to whether you should opt for pure term plan or return of premium plan, here are some factors you can consider to zero-in your purchase:
First we will begin by highlighting the prime difference between the two:
Also there are other constraints if you go by the Return of Premium plan---
1. Cost: In comparison to the usual term plan, return of premium plan is 2 or 3 times expensive. This is illustrated say for an example, a person aged 35 years who is a non-smoker and buys a sum assured plan of Rs. 1 crore, then the premium for term plan is around Rs. 10,000 while for the same tenure, in case of a return of premium plan the cost comes at around Rs. 39,036.
The reason for the lower cost in case of pure term plan is that it charges for the risk over that it extends.
2. No interest or extra benefit paid back in Return of Premium plan other than the premium amount: It is to be noted that while you pay the premium towards the policy at a regular time period for the term of the plan, you in case of survival through the term obtain only premium amount and any interest amount does not accrue on it.
3. Surrender value: In case if you surrender the pure term plan midway, your policy does not provides you any benefit, but in case of the RoP plan you are allowed a surrender value, i.e. computed basis the premium payment options (but surrender charges are high). So, herein also, even if you decide to exit the plan due to any probable reason, with the term plan you are left with a higher cash amount to consider other investment options than you would be with the RoP plan.
4. Paid up value is the only benefit available with RoP plan: Herein even if you discontinue to pay the premium amount towards the policy, the policy shall still continue but with reduced benefits. But to attain 'paid up value', the premium should have been paid for at least 3 years.
In this case, while at the policy maturity, policyholder will get back the paid premium, in the event of the death also, nominee will be entitled to lowered benefit amount.