Life Insurance: Zero-cost plan is not for everyone

Some insurance companies have started offering what the industry refers to as zero-cost term plans. While the name of this new variant of term insurance plans sounds attractive, policy buyers should know that it is not literally zero-cost.

Until now, there have been two types of term insurance plans in the market — pure term and return-of-premium (RoP) term plans. Pure term plans offer nothing if the policyholder survives the policy term. However, the nominee gets the sum assured if the person dies during the policy term. In contrast, RoP plans offer a return of premium if the insured survives the policy term, but are more expensive. In a bid to address the limitations of these two categories of life cover, insurers have started offering zero-cost plans that sit between pure term and RoP plans in terms of features.

Zero-cost policies allow the insured to discontinue the plan at a specified point and receive all the premiums paid until then. However, this facility is available only for very long-term plans. “Zero cost term plan is the terminology widely used for this feature. Practically, there are no free lunches, there will surely be an administrative cost, etc., attached to it in my view,” says Manju Dhake, vice-president, Insurance at 1Finance, a personal finance advisory firm.

How a zero-cost plan works
“It is certainly great flexibility on offer. This benefit is being offered as part of a normal term insurance plan — as an in-built feature at no extra premium. But you cannot exercise the exit option at any point of time during the policy period,” says Deepak Yohannan, founder, MyInsuranceClub. Suppose you take a zero-cost plan with a policy term of 40 years, in which you can exercise the exit option in the 25th year of the plan. After exit, you will get back all the premiums paid while the insurance company will face this scenario:

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Has received interest-free premiums for 25 years
Has you off its books when you are actually turning much riskier (with age).

Advantages & disadvantages
The zero-cost plan may be beneficial for those who want the money back if they survive until the policy term or otherwise consider buying a term plan as a waste of money.

The pre-condition of the specified policy tenure in zero-cost plans may be one of the reasons why the premium is a little more than pure term plans, according to Dhake. “Higher the policy tenure, higher is the premium in term insurance. However, you must evaluate your needs, understand the purpose or objective of the plan, and then take a decision for entering in any product which best fits with your life stage,” he suggests.

Should you buy it?
“If you have saved enough and don’t need the life insurance cover anymore, then it is good to get your premiums back and go on a vacation. But if you are using this to meet a cash crunch, it is a tricky decision as you are giving up your cover when you need it most,” says Yohannan.

Dhake says, “I suggest opting for the plain-vanilla plan as life-term insurance should be looked at from a protection perspective keeping the investment or wealth creation goal with other financial instruments.”

Know the risks
Taking a plain-vanilla term insurance is best as life insurance should be seen as a protection tool and not from an investment or wealth creation perspective
The facility to exit and get all the premiums back is available only for very long-term zero-cost plans and that too only after a specified period of time

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