Did you know that there is a new variant of the term life insurance cover which can be zero-cost for you? Read on to find out what these plans are and if they really are zero-cost policies. Read on to find out what these plans are and if they really are zero-cost policies.

REGULAR TERM PLAN VS ZERO-COST TERM PLAN

Under a regular term plan, if the policyholder dies during the policy tenure, his or her nominee will get the sum assured. No maturity amount is paid if he or she survives the policy term. There is another variant which is a return of premium term plan where the policyholder gets back all the premiums he has paid if he survives the policy term and if he has paid all the premiums regularly.

In a zero-cost term insurance plan, the policyholder has the option to exit the plan at a certain age and get all the premiums that he has paid minus GST. "Under this plan, if the policyholder feels that all liabilities are taken care of around retirement age and no longer wants the term insurance, he or she will get back the premium that they have paid excluding the GST," explained Sajja Praveen Chowdary, Head, Term Life Insurance, Policybazaar.com.

ZERO-COST TERM PLANS ALLOW EXIT BEFORE THE FULL TERM IS OVER

"In return for premium term plans, the policyholder has to pay the premium till the end of the term and then gets a return. In zero-cost term policies, the policyholder can exit the plan when they do not have any liabilities at a certain age," explained Chowdary.

LONG-TERM CONTINUITY MUST BE BEFORE THE EXIT IS ALLOWED

Zero-cost term insurance plans usually have a long policy term of 35 to 40 years. In Max Life Insurance’s Smart Secure Plus Plan, the exit option is available if the policy term is 40 years or above. If the policy term is between 40 years and 44 years, the policyholder will have the option to exit in the 25th policy year or at the age of 65, whichever is earlier, according to the policy document. For policy terms of 45 years and above, the policyholder can exit in the 30th policy year or at the age of 65, whichever is earlier.

In the Bajaj Allianz Life eTouch Term plan’s variants ‘Life Shield’ and ‘Life Shield Plus’, the early exit option is available during the three policy years just after the policyholder attains the age of 60. However, this will be allowed only when the policy term is 35 years or more and the policy should have been bought at the age of 50 years or below. If the policyholder's age at maturity is 68 years or less, there will not be any exit option, according to the policy document.

It is evident that the exit option is medium to long-term and is available only if the policyholder continues the plan for a long period. It must be noted that the exit conditions differ from one policy to another.

EXTRA AMOUNT THAT YOU PAY FOR ZERO-COST TERM INSURANCE

The return of premium plans may typically cost twice that of the regular term plans. The zero-cost term plans are comparatively cheaper than the return of premium plans. However, they are generally 25-35 percent costlier than traditional term insurance plans.

ZERO-COST TERM PLANS ARE TARGETED AT THOSE WHO BUY INSURANCE ONLY WITH A RETURN

The zero-cost term policies are aimed at the segment of customers who fear that if nothing unfortunate happens, they would be wasting the premiums paid for regular term insurance, say industry experts. If the policyholder chooses the exit option in these plans, they become zero-cost plans 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 he or she may not need life insurance anymore," Satishwar Balakrishnan, Managing Director & Chief Executive Officer, Aegon Life Insurance.

This policy is specifically targeted to encourage people who do not buy term insurance because there is no return on surviving the policy term,” he added.

"Zero-cost plans are preferred by the customers who are more conscious about 'losing' the amount paid for term cover on survival of the policy term and are more cost-conscious," added Casparus Kromhout, MD & CEO, Shriram Life Insurance.

ZERO-COST OR A GIMMICK?

Firstly, one should keep in mind that there is no concept of ‘zero-cost’ insurance. All insurance comes at a cost, whether it is a pure term plan, a return of premium, or any other type of policy.

"The customers should know that though they would be receiving the premiums back, they would be losing out on any interest they might have earned on the additional premium over the 20-25 years of the plan, and this is the 'cost’ associated with this type of plan," said Karthik Raman, Chief Marketing Officer, and Head - Products, Ageas Federal Life Insurance.

A traditional term policy for a 30-year-old that covers him for Rs 1 crore for a tenure of 30 years can usually cost around Rs 12,000 per annum. On the other hand, zero-cost term insurance of the same tenure can typically cost around Rs 15,500 per annum. So, if he buys a zero-cost term insurance plan, he is likely to spend around Rs 3,500 extra every year for 30 to 40 years.

A regular term plan can generally cost him Rs 3,60,000 if he continues it till the age of 60.

If he goes for a zero-cost term plan and exits after 30 years, the insurer is likely to pay back around Rs 4,65,000 (Rs 15,500 x 30) — GST amount when he exits the plan. However, rather than buying a zero-cost plan, if he buys a traditional term cover and invests the additional premium of Rs 3,500 (zero-cost insurance premium — term insurance premium) in an equity mutual fund Systematic Investment Plan (SIP) every year which gives 10 percent interest per annum, he can typically get around Rs 5.75 lakh after 30 years.

So, if he invests the additional premium, he can generate a corpus that will be the same or more than the amount he gets as a return of premium at the exit.

Many industry experts are in favour of pure-term plans over their variants. Explaining the advantages of traditional term plans, Raman added, “In a pure term plan, no premiums are returned on maturity but the premium one needs to pay for the same sum assured is quite less. In the case of death, the treatment is the same for both – payout of the cover sum assured.”

In a nutshell, buying a pure-term plan is always a good idea for financial protection. It is better to invest your surplus money than look to get it back after paying an extra premium for a long period.