Double Refund of Premium Term Plans: How Do These Work & What Are The Cons?

By all accounts, term insurance is supposed to be simple. You pay your premiums, and in the unfortunate event of your passing, your family gets the financial benefit. But what if you could get your money back, double, in fact, if you didn’t make a claim? This is one promise that ‘Double Refund Premium Plans’ make. The hook with these plans is an early exit option where you receive twice the total premiums you paid, and your life cover ends. However, it is particularly important to know the full spectrum of cons and pros before jumping on such deals.

So, what drives the interest in these plans, and more importantly who should be considering them?

The Pull: What are the Pros of 2X Return on Premiums

Suppose you bought a life insurance plan in your early 30s. You paid premiums for around 10 years and then forgot about it because you are still covered until you are 60 or 65. Now, fast forward to the time you enter your 50s.

If, by this time, you have done well, saved up good, your kids are settled and you are not as worried about having a life cover anymore - you can plan to exit the policy. The policy promises to give you double the premiums you paid, excluding taxes.

This feature is called the ‘smart exit’ option. Says Varun Agarwal, Head of Term Insurance at Policybazaar, “This feature offers the best of both worlds: pure protection and a guaranteed return if you don’t end up using the policy.”

Unlike endowment or ULIP plans, the refund in this case typically does not come with extra cost burdens. There is no maturity benefit rider to add on, no investment risk to take. The refund clause is baked into the standard premium. These term plans ensure a substantial payout at no additional cost beyond your standard premiums.

“Traditional term plans provide only a death benefit, but with a 2X refund of premium term plan, you not only get life coverage throughout the policy term but also receive the option to exit your policy at a particular age (generally 10 years before the policy term) and get double the total premiums paid,” Aggarwal states.

So who is this really good for?

According to Agarwal, such plans can be considered by:

Young professionals as they can lock in low premiums early, stay protected though most productive years, and walk away with double refund premium at later stage in life.

Family Breadwinners the ones with long-term dependents can also benefit from such plans as at the bottom line these are term plans which provide peace of mind and a financial cushion for the future.

Self-employed individuals who often did not have access to other formal (or government-backed) retirement plans or EPF.

And finally, retirement planners may also see this as a way to build a guaranteed, low-risk corpus that complements other investments.

Says Agarwal, “Since you receive twice the total premiums paid somewhere near your retirement age, these plans serve as an excellent retirement corpus or an inheritance fund for your loved ones. If life coverage is no longer needed after a certain age, you can exit and enjoy the benefits of this corpus.”

The Cons: What is the catch?

One of the biggest trade-offs with such plans could be ‘costs’. They could be slightly more expensive than standard term insurance. While regular term plans are about pure risk coverage, 2X ROP plans would charge more in exchange for giving something back.

Exit from 2X ROP plans is not that simple. You can’t decide midway that you need money and exit the plan. The refund happens only at a pre-decided age, usually 10 years before the policy’s end.

Thinking from the investment point of view, while the idea of doubling your money might sound great, it is important to remember your actual return on investment (ROI) may not be that impressive when compared with other investments such as mutual funds or long-term PPF savings.

It is important to clearly understand that the amount you get back is twice your premium, not double your sum assured.

It’s Not A Silver Bullet

It is significant to know that this is not the kind of policy you buy blindly. Such a policy could be fit for someone who has specific needs, for instance they want life cover now, and a tax-free, guaranteed amount (in this case premiums paid) later without managing market risk.

Such plans can be understood as neither pure insurance, nor pure investment. However, for the right person, it can deliver both in a meaningful way.

For those wanting to take a closer look at these plans, consider asking yourself following questions first:

• Can you afford the higher premiums for the next few years?

• Do you value guaranteed returns over higher but volatile investment options?

• What is your goal for buying a life insurance cover?

• Will you need access to the funds before the refund window?

Think about purchasing such a plan if your answers line up.