Understanding Term Insurance Term insurance is a pure risk protection plan that offers a death benefit to dependents if the policyholder passes away during the policy term. However, if the policyholder survives the term, no payout is made. This “no return” aspect often makes people question the value of term insurance. To address this concern, insurers have introduced a new concept: Zero—Cost Term Insurance.
What is Zero-Cost Term Insurance? Zero-cost term Insurance plans, also marketed as “smart exit” or “special exit” plans, offer a unique option for policyholders to exit the policy early and get a refund of the premiums paid. Aayush Dubey, Co-Founder and Research Lead at Beshak.org, explains that policyholders can exit the plan during a specific window the insurer sets. Upon leaving, they receive a refund of their premiums minus Goods and Services Tax (GST).
How Do Zero-Cost Term Insurance Plans Work? When buying a traditional term insurance plan, the policy term is usually chosen based on the expected age of financial independence. This is the age when debts are paid off, and sufficient wealth has been accumulated to support oneself and dependents. However, financial freedom may be achieved earlier than expected, rendering continued insurance coverage unnecessary.
Here’s an example to illustrate how Zero Cost Term Insurance works:
- Case Study: Raj, a 35-year-old, purchases a 30-year term plan with a Rs 1 crore cover. By the time Raj turns 50, he’s financially independent. He’s paid off his home loan, and his son is self-sufficient. Raj forfeits all premiums paid if he stops the policy in a regular term plan. However, with a Zero Cost Term Insurance plan, Raj can exit during a predefined window and receive a refund of his premiums (net of GST) if he follows the insurer’s guidelines.
Example of Exit Windows: Some insurers offer specific exit windows. For example, HDFC Life’s Click 2 Protect Super Plan allows a withdrawal between the 30th policy year and the last five years of the policy. This means if Raj purchased his policy at age 30 and it runs until age 75, he can only exit and receive his premiums back between the ages of 61 and 70. Tracking this exit window is essential to avoid missing out on the refund opportunity.
Conditions of Zero Cost Term Insurance Plans These plans have several essential conditions:
- Exit Window: The exit option is only available during the insurer’s predefined window, which varies by policy.
- Refund Calculation: The refund includes only the base premium, additional underwriting premiums, and payment frequency loadings. Rider premiums and taxes are not included.
- Policy Continuity: The plan must remain active and in force until the exit.
- Refund Upon Exit: The policy is terminated once the refund is received.
- Restrictions: This option is unavailable in Return of Premium (ROP) term plans.
Are Zero Cost Term Plans Truly Zero Cost? At first glance, Zero Cost Term Insurance plans seem like a cost-free option, but a closer analysis reveals some caveats. While you may receive all the premiums paid back (minus GST), the refunded amount does not factor into the time value of the money. Essentially, there’s no interest, inflation adjustment, or investment return.
Example of Cost Analysis Consider a 30-year-old non-smoker paying Rs 15,863 annually for a Rs 1 crore cover. If the policyholder exits at age 60 after 30 years of payments, they receive a refund of Rs 4,03,290 (net of GST). However, if inflation is considered at 6% per annum, the future value of Rs 4,03,290 after 30 years would be equivalent to just Rs 70,216 in today’s terms. While you get your money back, its purchasing power is significantly reduced.
Key Takeaways
- Track the Exit Window: Missing the insurer’s exit window could result in losing the refund opportunity.
- Understand the Refund Calculation: Only base and underwriting premiums are refunded, excluding rider premiums and taxes.
- Evaluate the Time Value of Money: Inflation significantly erodes the refund’s actual value while you get your premiums back.
Should You Buy a Zero Cost Term Plan? Before buying a Zero Cost Term Insurance plan, please carefully review its terms and conditions. Each insurer’s policy is different, and missing the exit window can result in a loss of the refund benefit. Consider the time value of money — while you get your premium back, inflation reduces its value significantly.
According to Aayush Dubey, choosing such a plan is essential if it genuinely aligns with your financial goals and provides peace of mind for the future. Carefully evaluate the costs, benefits, and your overall financial strategy before committing to a Zero Cost Term Insurance plan.