When the time comes to save taxes, most of us start looking for an insurance policy. When scrolling down the type of insurance policy one could buy, one must have come across a zero-cost plan. Imagine yourself diligently carrying out your responsibility to protect your loved ones' future by paying term insurance premiums year after year. However, with new-age insurance products coming into the market such as zero-cost term plan where one would get all the premiums paid back after a specific age, one starts to wonder-what if I don't need the coverage forever. However, the question is are these plans really zero-cost or just a marketing gimmick? In this article, we are going to discuss the same.

Difference between Zero-cost term plans versus regular term plans

If the policyholder unfortunately passes away within the policy's term, the nominee will get the sum assured under a standard term plan. If the policyholder lives out the term, there is no maturity payment made. In the 'Return of premium term plan, the policyholder receives a full refund of all premiums paid, provided s/he lives out the policy term and makes timely premium payments.

In the Zero cost term insurance plan, the scenario is a little different. The policyholder in a zero cost term insurance plan can choose to leave the plan at a specific age and receive a full refund of all premiums paid minus GST. In other words, in this type of policy, one can exit before the full term is over. This plan can be opted by those who feel like their liabilities will be covered by retirement age and they no longer would need the term insurance.

In the 'Return of premium plan', the policyholder is required to pay the premium until the end of the term in order to receive the refund. However, with a Zero cost term insurance plan, the policyholder can cancel their plan if they do not have any liabilities at a certain age.

Who should buy a Zero-cost term insurance plan?

Zero cost term insurance is intended for people who purchase insurance solely for financial gain and are more cost-conscious and conscious about 'losing' the amount paid for term cover. According to industry analysts, the zero-cost term policies are targeted at the group of consumers who believe they would be wasting their standard term insurance premiums if nothing untoward were to happen. These plans become 'zero-cost' plans for the policyholder if they select the exit option.

Some experts seem to suggest that if one has accumulated sufficient assets and achieved all of their life goals while still in their fifties and may no longer require life insurance, one can enroll in a zero-cost term insurance plan. One could say this policy is to encourage people in buying term insurance who don't choose term insurance because it doesn't comes with survival benefits.

Is it a marketing gimmick or does it make sense to buy it?

First of all, it's important to remember that "zero-cost" insurance does not exist. Whether it is a return of premium, a pure term plan, or any other kind of coverage, any type of insurance comes with a cost and to know the exact premium that you will be paying for it can be calculated using zero cost term insurance plan.

The customers should know that though they would be receiving the premiums back however, they would be losing out on any interest they might have earned on the additional premium over the 20–25 years of the plan, and this is the 'cost' associated with this type of plan. Understand this with the following example:

Approximately Rs 12,000 per year is often required for a 30-year-old to get a traditional term policy that insures him for Rs 1 crore over a period of 30 years. Zero-cost term insurance for the same duration can normally run you about Rs 15,500 annually That means that if one purchases a zero-cost term insurance plan, they will probably have to pay an additional Rs 3,500 a year for 30 to 40 years if one calculates via term plan calculator. On the other hand, you could pay Rs 3,60,000 for a standard term plan if one keeps it till they are 60 years old. When one exits from a zero-cost term plan after 30 years, the insurer will probably reimburse him for about Rs 4,65,000 (Rs 15,500 x 30) — the amount of GST. Instead of purchasing a zero-cost plan, experts seem to suggest purchasing a standard term cover and investing the extra premium of Rs 3,500 (zero-cost insurance premium — term insurance premium) in an equity mutual fund Systematic Investment Plan (SIP) every year. Considering the average annual interest you will get is 10%, you can receive approximately Rs 5.75 lakh after 30 years. Thus, if one invests the extra premium, they will be able to generate a corpus that equals or exceeds the amount they receive as a return of premium return upon exit.

To exit from the Zero-cost term plan, there must be long-term continuity. Usually, these plans come with a 35-40-year policy tenure. According to the policy statement, the policyholder will have the opportunity to exit the policy in the 25th policy year or at the age of 65, whichever comes first, if the policy term is between 40 and 44 years. The policyholder may terminate the policy at any time during the 30th policy year (only if the policy term is 45 years and above) or at the age of 65, whichever is sooner. In some types of policies, there will be no exit option if the policyholder is 68 years of age or younger at maturity. By now, it is clear that the policyholder must continue the plan for a particular period in order to exercise their exit option, which is medium- to long-term in nature. At the same time, one needs to understand that every policy comes with a different set of requirements.

Using a term plan calculator will demonstrate that the cost of 'the return of premium plans' is double that of a standard term plan. If one compares the cost with the help of a term plan calculator, one will see the return on premium plan costs higher (often 25–35 percent) than that of the zero-cost term plans.

Industry experts seem to prefer term insurance plans over other types of variants. In a pure-term plan, one is required to pay less on the premium for the same sum assured and the same can be calculated using the term plan calculator but no premiums are returned upon maturity. To put it briefly, purchasing a pure-term plan is always a wise choice if you want financial security. Investing the additional money is a better option than trying to get it back after paying a premium for an extended duration of time.

Zero Cost Plan-Marketing Gimmick or Is It Worth It?