What Are Zero Cost Term Insurance Plans?

by SMCIB on Wednesday, 26 April 2023

What Are Zero Cost Term Insurance Plans?

Term insurance is like a fire sprinkler system, it's there to prepare for and mitigate risks, but you won't benefit from it until a loss occurs. Buying a term insurance policy is a proactive move to ensure your loved ones are safe despite life's challenges. And, that's why it's called a 'pure risk protection plan'. In the event that you pass away while the policy is active, it will pay a sum of money to your family.

But, if you survive the policy term, you don't receive anything back.

It can feel like sowing a seed in the ground, watering it for months, and not seeing any results. You put in the effort, make years of payments, but in the end, you have no return on your investment. This can be discouraging for many.

That's why the insurance industry came up with something called Zero Cost Term Insurance Plans. What are Zero Cost Term Insurance Plans? How do they work? Let’s find out!

What Is Zero Cost Term Insurance?

A zero cost term insurance plan is also known as a smart exit plan, early exit plan, or special exit plan. It gives you the flexibility to withdraw your term insurance coverage within a specific period of time by quitting your plan when it is active. If you do so, the insurer will refund all the premiums you've paid till date - net of GST.

For example:
Ravi, a 30-year-old, buys a zero cost term insurance plan with a sum assured of Rs 50 lakhs for a policy period of 20 years. He needs to pay an annual premium of Rs 50,000 (net of GST). As per the policy, withdrawals are allowed between the 13th and the 18th policy year. Ravi exits his policy during the 16th policy period.

So -

Total premiums paid over the 16-year period = 50,000 x 16

                                                                        = 8,00,000

So, Ravi will receive a premium refund of Rs 8,00,000.

Are Zero Cost Term Insurance Plans the same as Return of Premium Plans?
No. A return of premium plan refunds your paid premiums (net of GST) only if you survive the policy period, while a zero cost term insurance plan refunds the premiums you have paid (net of GST) if you quit the plan during the given time frame.


How Do Zero Cost Term Insurance Plans Work?

One of the most important factors to consider when purchasing a term insurance policy is the policy duration. You need to estimate the age at which you will have fulfilled your financial obligations, i.e., when you will have settled your debts/liabilities and created enough wealth to last for the rest of your life. By this time, your financial dependents may also become self-sufficient and may not need this layer of protection.

To put it simply, you need to figure out when you intend to retire. Term insurance coverage is essential until this age - perhaps with an extra period of 5 years.

However, you may become financially independent sooner than expected, thereby negating the need for term insurance earlier. If this is the case, it can seem unnecessary to spend your hard-earned money on premiums and you may want to consider investing in other financial options to grow wealth.

For example:
Madhav, a 35-year-old man, lives with his wife and a 7-year-old daughter, who are financially dependent on him. He has a business loan of Rs 25 lakhs and a car loan of Rs 5 lakhs. He wants to make sure his family is financially secure and that the repayment burden does not affect them. So, he purchases a term insurance plan with a sum assured of Rs 80 lakhs for a policy period of 30 years. The cover amount will take care of the loan repayment and help his family meet their everyday needs and financial goals in his absence.

However, when Madhav turns 55, he receives high returns from his other investments. He uses the money to pay off both his loans. And, Madhav's daughter now works as a government employee and does not require his financial support. Thus, Madhav can now take care of his spouse and his retirement with his income.

In this case, term insurance isn't necessary for him anymore. And, if he stops paying the premiums, he won’t get anything in return.  What could have been the possible solution for Madhav? A zero cost term insurance plan. If Madhav would have had a zero cost term insurance plan and withdrew from it, he would receive a refund of all the paid premiums (net of GST).

Are There Any Conditions For Withdrawal?

Yes, withdrawal is permitted only during the predefined time frame - as specified by your insurer. This is usually around the time when your responsibilities have been fulfilled and you are financially independent. Depending on the insurance company, this time period may vary.

For example,

  • Under the Aegon Life iTerm Comfort Plan, you can withdraw from it at any time for one year once you turn 55.
  • The Indian First eTerm Plus Plan allows withdrawal once you turn 65 or have completed paying 25 full-year premiums - whatever happens earlier.

Apart from the predetermined time period of withdrawal, zero cost term insurance plans may also have other conditions, like -

  • You can withdraw the plan only after you send a written request to the insurer about it.
  • The option is available only if you choose the regular premium payment option.
  • You may not be allowed to withdraw your plan if you have opted for the life stage benefit feature, the return of premium option, etc.

Depending on the insurer, the conditions may vary. Before making a decision, make sure you read the policy wordings carefully and thoroughly.

Wrapping up!

A regular term insurance plan doesn't give you any returns if you survive the policy period. However, zero cost term insurance has a unique advantage over it. It refunds your paid premiums (net of GST) if you wish to opt out of it during the timeframe specified by the insurer. So, if you are looking for a term plan that gives you some sort of returns, zero-cost term insurance is a good choice. However, before you invest in the plan, be sure to read the policy wording - so you know exactly what you are signing up for.

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