Term Insurance Plans at No Cost

A term insurance plan provides a substantial payout to your beneficiaries in the unfortunate event of your demise. If you purchase such a plan at a young and healthy age, you can secure a coverage of 1 Crore for a relatively modest annual premium of approximately ₹10,000. This already presents an excellent value proposition. Now, envision taking it a step further—imagine obtaining this term insurance plan and securing coverage without any financial outlay.

" This is the commitment of zero-cost plans, and in this article, we will explore how they function, their advantages, potential drawbacks, and whether our team of IRDAI-certified experts recommends these plans.

The Mechanism Behind Zero-Cost Term Plans

" Zero-cost term insurance plans operate by committing to refund your premiums at a predetermined date, effectively reducing your total expenditure to zero. In theory, you could purchase a term insurance plan, make the usual premium payments for a specified number of years, and then opt to forfeit the policy, with all your premiums returned to you on this date. This means you can access the benefits without any financial outlay.

" However, this approach might appear puzzling. Why would an insurance provider offer to extend a term plan at no cost? How could they sustain a profitable business model, particularly when most companies handle numerous claims annually, amounting to substantial sums?

" The reality is that insurance companies impose various conditions before granting such plans. Let's examine a case study based on a zero-cost plan provided by a prominent life insurance company in India.

" Case Study: A 30-year-old individual is interested in purchasing a term insurance plan, and the insurance provider suggests the zero-cost variant to secure the sale. The customer agrees. However, before finalizing the contract, the insurance company will require the individual to buy a policy with a maturity age of 70 or older. They will explain that the zero-cost variant is exclusively available for policies with a term lasting 40 years or more. Furthermore, they will stipulate that the policy must be surrendered before the 25th policy year or between the ages of 65 and 66, whichever occurs earlier. In the case of the 30-year-old, the individual would need to surrender the policy as soon as they turn 55 to receive the premium refunds. Once the policy is surrendered, it cannot be renewed, and it will be terminated.

" In summary, while these plans are marketed as zero-cost options, they come with several conditions and aren't truly cost-free. Nonetheless, since you can access this option without paying additional premiums, it might appear tempting. Nevertheless, in our opinion, this isn't always the most advisable choice.

Verify sub-limits based on the type of illness

" Imagine you're 35 and looking to buy a term plan. Now if you spoke to our IRDAI-certified advisors they would tell you that you need to select a policy term based on your expected age of retirement. So if you were retiring at 60, we would ideally tell you to buy a policy with a term of 25 years. That way you'd have coverage until your retirement.

" The logic here is simple. A term plan should cover your dependents and offer monetary benefits that resemble your own earning potential. And since after retirement your children and spouse don't usually depend on you, it doesn't make sense to buy a term plan that offers coverage beyond this age. Obviously, you could go up to 65 or 70 depending on your own needs, but we don't usually recommend buying a policy that lasts beyond 70 because of the extra premium you'll likely end up paying and the general lack of utility that a term plan has to offer.

" Now imagine you are convinced by the logic, you save a few thousand rupees every year and you get a term plan that offers exactly the coverage you need. However the allure of a zero cost option may affect your decision. If you are told that you can avail this benefit only if the policy term breaches 40 years, then you may be tempted to buy a policy that offers you coverage until the age of 75 (your current age 35 + policy term 40) even though you only really needed a policy that lasts until the age of 60. This pushes your premium higher. So while you can avail a zero cost plan without paying an additional premium, you may still end up spending a lot more money than you would have otherwise.

" Secondly, the insurance company will return all your premiums at some future date as a lumpsum. But this is not equal to the total cost you end up paying to buy and retain the policy in the first place. The ₹10,000 you pay in premium isn't the same as the ₹10,000 the insurance policy returns some 25 years later. It could be worth as little ₹2,000 in today's money because of inflation. So you have to remember that there's a hidden cost here which doesn't factor into your calculation.

" But that's not all, the insurance company will only return the premiums you've paid them during the time the policy remained active. They will not return the GST.

" And finally, the insurance company can make this work, because most people forfeit the policy before the term is complete. This is when most of the claims usually pop up. It's in these advanced ages that insurance companies have to make substantial payouts due to the higher mortality rates. But if they can get people to forfeit the policy much earlier, they can get away with paying a much smaller amount. In effect, the economics is always in favour of the insurance company. So the question is - What are the real benefits of buying a zero cost plan?

Advantages of Zero-Cost Term Plans

• Many insurance companies provide this benefit without requiring any extra premium payments.
• Furthermore, the decision is entirely in your hands. You can opt to continue with the policy until it reaches maturity or exercise the zero-cost option by surrendering the policy—your choice entirely.
• If you are in your early twenties and you are purchasing a policy with a term of 40 years or more, it can be a worthwhile benefit. Opting for the zero-cost plan incurs no additional cost, making it a sensible choice.

Top Zero-Cost Term Insurance Plans