TROP: Is It a Savvy Investment or a Pricey Illusion?

When you’re in the market for term insurance, you’ll quickly encounter an option that seems to offer the best of both worlds: the term plan with return of premium (TROP). The appeal is undeniable. You get the high life cover of a standard term plan, but with the added promise that if you survive the policy term, all your premiums will be returned. It sounds like a win-win, but is it a savvy investment or a pricey illusion?

The Core Promise of TROP

A traditional term insurance policy is pure protection. It provides a death benefit to your nominee if you pass away during the policy term. If you outlive the term, the policy expires, and you get nothing back. This “use-it-or-lose-it” nature is precisely what makes it so affordable.

A term plan with return of premium works similarly, providing a death benefit. The key difference is the survival benefit. At the end of the policy term, if you are alive, the insurer refunds the total amount of premiums you have paid. This feature is psychologically appealing to those who dislike the idea of their money “going to waste.”

The Price of the Promise

While the return of premium sounds great, it comes at a significant cost. The premiums for a term plan with return of premium are substantially higher—often 1.5 to 3 times more expensive than a pure term plan. This is because the insurer is not just covering the risk of your death; they are also managing a small savings component to ensure they can return your premiums at maturity.

So, is this a good investment? Let’s break down the illusion:

• No Real Returns: The money you get back is just a refund of your own premiums, without any interest or appreciation. It’s not a return on investment. The value of that money will be significantly eroded by inflation over the years. A ₹50,000 refund after 20 years will have far less purchasing power than the ₹50,000 you paid in premiums.
• The Opportunity Cost: This is the most critical factor to consider. The extra premium you pay for a TROP could have been invested elsewhere to generate real wealth. For example, if you save the difference in premium between a pure term insurance plan and a TROP and invest it in a market-linked instrument, like a mutual fund SIP, you could potentially generate a much larger corpus than the simple refund you’d get from a TROP. This disciplined investment approach offers both robust protection and wealth creation.

TROP vs. The Smart Financial Move

The smart financial move is to separate your protection and your investments. Your term insurance is your family’s safety net; it is not a tool for wealth creation.

• For Pure Protection: A standard term insurance policy offers the maximum possible life cover for the lowest possible premium. This is the most efficient way to secure your family’s financial future.
• For Investment: The money saved by choosing a pure term plan should be systematically invested in avenues designed for wealth creation, such as mutual funds, stocks, or other assets.

Who Should Consider a Term Plan with Return of Premium?

A TROP isn’t for everyone, but it can be a suitable option for a niche audience:

• Those who lack financial discipline: For individuals who find it difficult to save or invest regularly, a TROP acts as a forced savings tool. At least they will get their money back, which is better than having no protection or savings at all.
• Those with a low risk appetite: If the idea of getting nothing back from a pure term plan makes you uncomfortable, a TROP can offer a psychological comfort that allows you to secure essential life cover.

In conclusion, while a term plan with return of premium offers the appealing benefit of a premium refund, it is rarely the most financially efficient choice. For the vast majority of people, a pure term insurance policy remains the superior option. It’s a powerful tool for pure protection that allows you to channel the money you save into real investments, truly building a secure and prosperous future.