What is a Zero-Cost Term Life Insurance Plan that is being sold by insurance companies in India (2023) these days? Is it different from Return-Of-Premium Term Plans and if yes, what is the difference? And is the Zero-Cost Term Insurance really zero cost and free of cost as the name suggests?
We shall discuss zero-cost term plan in detail and see why you should buy it or why you should avoid zero-cost term insurance plan.
While there should be no doubt that term insurance is the best form of life insurance, a lot of people in India still don’t like the idea of term plans as there is no ‘returns’ that they can get from it on maturity (survival). They feel that if they survive the policy term, then in term plans they are wasting a huge amount towards the premiums paid for.
While that is not the right way to look at it, insurance companies have used this fear to their advantage. First, they came up with Return-Of-Premium (TROP) term plans and now, have launched Zero-Cost Term Insurance Plan in India (2023). The zero-cost term policies are aimed at customers who don’t want to waste the premiums paid for regular term insurance if they survive. And these are people who have never bought term plans just because of no return angle.
Many people consider these zero cost term insurance plans as 100% Refund of Premium (at No Cost) Plans. But that is again far from truth as you will see in a bit. While the name of this new term plan variant is definitely attractive, buyers need to understand that it is not literally zero-cost as we shall see in a bit.
What is Zero-Cost Term Insurance Plan (2023)?
A zero-cost term insurance plan is a variant of term plan which offers an option for early exit (or surrender of term plan) during the policy tenure. If you opt for this option, then insurance company will allow you to exit (if you want) your term life insurance plan after a specific time period has passed and also, return or refund you all the 100% premiums you paid till date (minus GST paid).
So simply speaking, and unlike regular term plans, a zero-cost term insurance is simply a term plan with an early exit option where you are refunded all your premiums paid till date.
How does Zero-Cost Term Insurance Plan Work (2023)?
To understand how these zero-cost term insurance plans work, let’s take an example.
Suppose you are a 35-year-old person, who recently bought a Rs 1 crore term plan with zero-cost option for a tenure of 35 years. You started paying premiums regularly for years. Now after several years at age (say) 60, most of your financial goals, responsibilities, and liabilities are over. You have also built up a Retirement Corpus of Rs 5 Crore and your child is settled.
But age 60, you have only paid premiums for 25 years (from age 35 to 60) and the policy term is 35 years. So still 10 more years are left. But from a financial perspective, and since your responsibilities and liabilities are already over, there is no technical need for life insurance for 10 more years till age 70. And in such a scenario, paying premiums for the rest of the policy duration doesn’t make sense. Why would you want to pay premiums for a product that you don’t need anymore? Isn’t it?
This is where zero-cost term insurance plan comes into the picture. The plan allows you to exit your term life insurance policy prematurely and also, get back all the premiums you have paid over the years (25 years in our example above). Such an option is obviously not available in regular term insurance plan where you don’t get back anything if you stop paying the premium.
But there is a small caveat. You cannot just exit the zero-cost term plan whenever you wish. You need to exit the plan during the predefined exit window only. This exit window varies from one insurance company to other and generally opens only after several years of policy existence.
For example, a leading life insurance company offers the option to exit/withdraw under zero-cost term plan, but only once you have paid premiums for 25-30 years already! And you have to do it before the last 5 years of the policy tenure
So say if you bought the zero-cost term policy at age 35 up to age 80. You will have the option to withdraw and claim the 100% premium refund between your age 65-75 years only.
That is how zero-cost term plan or 100% Refund of Premium Term Plan at No Cost works.
So these Zero-cost term life policies allow the insured to discontinue and exit the term plan at a specified point in future and receive all the premiums paid back until then. However, this option is available only for very long-duration term plans of 30-40 years.
And while they are called zero-cost and return the premiums back, these plans are much more expensive (typically 20-35%) than plain vanilla term plans. So it is not exactly a zero-cost plan. More so if you consider the time value of money.
How?
Let me explain and prove it.
Let’s say at age 30, you buy a Zero-Cost Term Plan of Rs 1 crore for 40 year tenure. For this, you need to pay an annual premium of Rs 15,000 per year. Now after (say 25 years), you have accumulated enough savings that you don’t need a life insurance.
So you want to exit the zero-cost term plan. You have paid a total of Rs 20,000 x 25 year = Rs 5 lakh as premiums (plus taxes). Now if you exit, the insurance company will refund back Rs 5 lakh in 25th year. You will feel that you have got back the full money and hence, this is zero-cost term plan and this is good.
But money loses value due to inflation resulting each year. The value of Rs 20,000 paid each year for Rs 25 years is a lot more than Rs 5 lakh returned back after 25 years. If I were to calculate the present value of this Rs 5 lakh that you get after 25 years, then at 6% rate, it will only be Rs 1.17 lakh. Imagine you pay premiums from 2023 for 25 years till 2048, and then get back Rs 5 lakh in 2048-49, which will only have a real value of Rs 1.17 lakh (in today’s 2023 value).
So it’s not exactly zero-cost if you do your calculations correctly.
Upon withdrawing from these zero-cost plans, you will only receive the exact sum of your accumulated premium payments over the years, with no additional amount. The disbursed amount will consist only of the total premiums paid, without any adjustment for inflation or additional interest of any kind.
Had you taken a simple term plan instead, and invested the difference amount of extra premium (that you need to pay for zero-cost term plans), you would have created a bigger corpus in 25-30 years than what you get as full refund of premiums in zero-cost term plans.
Let’s now compare Zero-Cost term plans with Return of Premium Term Plans
Zero-Cost Term Plan Vs Return of Premium Term Plan (2023)
Here is the comparison table of Zero Cost Term Plan vs Return of Premium Term Plans in India
- Zero Cost Term Plan is cheaper than the Return of a premium term plans. The difference would vary across insurers but generally, the Return of Premium term insurance cost 60-80% premium than zero cost term insurance.
- In zero cost term plans, you have the option to either exit early and take your premiums back, or you can continue paying for the full tenure if you want. In return of premium term plan, the insurance coverage will continue till the end of the policy term on premiums being paid and the return of premiums benefit is paid only at the end of the full policy term.
So that is how zero-cost term insurance is different from return of premium term plans.
Zero-Cost Term Plan Vs Regular Plain Term Plan (2023)
Here is the comparison table of Zero Cost Term Plan vs Regular Term Plans in India
- In a regular-term insurance plan, if the premium is paid regularly and the policyholder dies during the policy term, sum assured is paid to the nominees. If the policyholder survives the term, then there is no payment made as there are no maturity benefits in term plans.
- In Return of Premium Term Plan (or TROP), if the policyholder survives the policy term, all the premiums paid back are returned without interest (and after deducting taxes) to the policyholder on maturity. Generally, the return of premium plans cost twice as much as the regular term insurance plans.
So that is how zero-cost term insurance is different from regular term insurance plans.
Should you Buy the Zero-Cost Term Insurance Plan?
Simple plain term insurance is the simplest and most effective form of life insurance. And for this reason alone, one is always better off buying simple term plans. Given the facility to exit and get all the premiums back available in zero-cost term insurance plans becomes available only after a very long-term and that the actual value of money being returned after so many years is a lot less due to inflation, there is no real need to purchase a zero-cost term plan.
You are much better off with a simple term plan. But if you are among those who needs life insurance cover but has still been avoiding term plans because of no return or no maturity benefit, then you can still go for zero-cost term plans instead of remaining underinsured.
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Hopefully, this article would have explained and cleared your doubts about What is a Zero-Cost Term Life Insurance Plan that is being sold by insurance companies in India (2023) these days? And how is it different from Return-Of-Premium Term Plans and plain, vanilla and simple regular term plans in India (2023).