When Priya’s parents retired, she was comforted to know that they had been investing in term insurance for years. Any unexpected financial difficulties due to their death did not worry her as she knew the insurance coverage would support her. However, when her parents decided to surrender their term insurance and withdraw their funds, she was shocked to learn that the insurance would not provide a refund. This incident prompted her to research term insurance further. She came across two main types of term insurance: pure term insurance and return of premium term insurance. Read on to understand the difference between these two types of term insurance and choose the one that best suits your needs.
learn more: Why buying life insurance online makes financial sense
What is Pure Term Insurance?
Pure term insurance is Life Insurance This is insurance that provides insurance for a specific period of time. If the policyholder dies during that period, the beneficiary receives the death benefit. However, this type of term insurance does not come with a survivor benefit. In other words, if the insured person outlives the insurance period, they will not receive the maturity benefit.
What is refundable premium term insurance?
In a term insurance with refund of premium, the policyholder receives the entire premium paid (excluding GST) at the end of the policy term. This type of term insurance provides survival benefits and ensures that the policyholder gets back the premium paid by the insurance company.
learn more: 8 Ways to Find a Deceased Person’s Life Insurance Policy
Differences between pure term insurance and premium refund term insurance
Below is a table comparing the differences between pure term insurance plans and term insurance with refundable premiums.
|
Parameters |
Pure Term Insurance |
Term plan with premium refund |
|---|---|---|
| Survival or maturity benefits | If the policyholder survives the policy term, no premium is refunded. | It provides survival benefits including refund of all premiums paid during the policy period plus accrued bonuses, if any. |
| Surrender value | If you waive, your benefits and compensation will cease immediately and no refunds will be issued. | If you cancel your policy, your insurance coverage will end and you will receive only a small portion of the premiums you have paid back. |
| Tax exemption benefits | The premium paid is eligible for tax deduction under Section 80C of the Income Tax Act. Death benefit under Section 10(10D) of the Income Tax Act is exempt from tax. Further, premium for critical illness rider is also taxable under Section 80D. | All tax benefits associated with pure term insurance plans are available. In addition, other benefits such as maturity benefit and survival benefit are also tax-free. |
| Returns accepted | If you stop paying your premiums, your insurance will end. | The policyholder has the right to cancel the insurance contract and receive back the premiums paid up to that date, net of deductions. The deductible limit must be agreed upon in advance with the insurance company. |
| Continuous protection | If you stop paying your premiums, your policy will lapse and you will lose benefits. | If you stop paying premiums, your insurance will remain in effect, but benefits may be reduced. |
| advantage | The premiums are significantly cheaper than other types of insurance. | In a term insurance with refund of premiums, the time for payment of the insurance benefit is fixed, which is at the time of death if the insured dies, or at maturity if the insured survives the insurance period. |
| Disadvantages | Premiums increase over time as long as the insured is alive, and upon death the policy ceases to be payable. | Premiums are high, but far less than whole life insurance, and they also increase as the insured gets older. While it is possible to recover the full amount paid, the amount is not as great as the returns from other investment options. |
Before deciding whether to buy term insurance online and what type of insurance to buy, consider analyzing the insurance market, your financial situation, needs, and other relevant factors discussed above. Term insurance plans with premium refund plans offer survival benefits that regular term insurance does not. However, they usually have higher premiums than regular term insurance.
Suresh KP is the Founder of Myinvestmentideas. He is a NISM Certified Investment Advisor and NISM Certified Research Analyst. He has been involved in analyzing financial markets for the last 20 years. He can be reached at suresh@myinvestmentideas.com.
