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Pure Term Insurance vs Return of Premium vs Permanent Life Insurance – A Quick Comparison

Life Insurance is perhaps the simplest form of insurance yet the most important to have in your portfolio. There are many variants of life insurance but it is broadly classified into two types – 

  • Term Insurance
  • Pure Term
  • Term Return of Premium
  • Permanent Life Insurance

All three variants come with their own set of oh-so-good and not-so-good features. Hence, it is only obvious for anyone to get baffled on which one he should buy. Well, the simplest answer is, the best is the one that fulfills your specific insurance needs. Here’s a quick comparison between the three to put an end to your confusion once and for all. 

 

Pure Term

Term Return of Premium

Permanent Life Insurance

Definition

 

A form of life insurance where the insured gets a life cover for a specific term. If he outlives the policy term, he gets nothing

Only Death Benefit

No Survival Benefit

No Cash Value

A form of insurance where the insured gets a life cover for a specific term.  If he outlives the policy term, he gets the maturity benefit

Death Benefit

+

Survival Benefit

A form of insurance where the insured gets a life cover for the entire life. A portion of the insured’s premium is deposited into a cash-value account

Death Benefit

+

Savings Component

Validity

The coverage lasts for a specified term that can vary from 10-30 years

The coverage lasts for a specified term that can vary from 10-30 years

The coverage lasts for insured’s entire lifetime (as long as he keeps paying the premium)

Death Benefits

Flexible death benefit

Flexible death benefit

Fixed death benefit

Survival Benefits

No survival benefits

Survival benefit includes the total of all the premiums paid during the policy term plus accrued bonus, if any

The insured gets to enjoy a growing cash-value

Premium

                                                        <                                                        <                       Premium may vary                    Premium may vary                    Premium remains constant

 

Surrender

 

In case you surrender the policy before the term, you stop getting covered then and there and get nothing

In case you surrender the policy before the term, your cover is ceased and you end up getting just a small fraction of the premiums paid

When you surrender the policy, your cover is ceased but you get the interest earned on your investment account (the accumulated cash value)

Tax Benefits

Sec 80C – Premium paid eligible for tax deduction

Sec 80D – Premium paid for critical illness rider eligible for tax deduction

Sec 10(10D) – Death benefit is tax free

Sec 80C – Premium paid eligible for tax deduction

Sec 80D – Premium paid for critical illness rider eligible for tax deduction

Sec 10(10D) – Death benefit is tax free. The maturity benefit received at the end of the policy term is also tax free

Sec 80C – Premium paid eligible for tax deduction

Sec 80D – Premium paid for critical illness rider eligible for tax deduction

Sec 10(10D) – Death benefit is tax free

The cash value grows on a tax-deferred basis. However, if the policy is surrendered before the term, the cash value (the fraction exceeding the paid premium) is taxable

Pros

The cheapest form of life insurance

The premium is substantially low compared to any other form of insurance

The smartest form of life insurance

 

A TROP is a win-win scenario. In case the insured dies, death benefit is paid; in case he survives, maturity benefit is paid

The most dependable form of life insurance

The premium is high but remains constant unlike in pure term or TROP plan

The cash value keeps increasing every year on a tax-deferred basis. You can either use it to pay your future premiums (paid-up mode) or take a loan against it (at a much lower interest than a bank loan).

Cons

 

The premiums are low when the insured is young, but keep on rising as he ages

No benefits paid if the insured outlives the policy term

The premium is quite high compared to pure term, though not as high as in whole life policy. It increases with the age of the insured

Though you get the refund of all the premiums paid, the return is substantially less than what you could have earned in other forms of investment

The premium is significantly high in comparison to pure term and TROP plans (though this is totally justifiable considering the fact that the insurer is covering an ever-increasing risk at a constant premium)

The insured has to bear the premium expense even during his old age or when he’s unemployed

The cash value can’t be withdrawn until the policy is surrendered. If the insured dies, the death is paid to the beneficiary but the insurance company gets to keep the cash value

Who should buy it?

The objective to buy a life insurance is to give a financial protection to your dependents, in case of your demise

But after a term, your kids are going to get self-sustainable and won’t be dependent on such a financial cover. Considering this, it only seems wise to buy a Term Insurance instead of Whole Life policy

If the chances of the policyholder to outlive the term are high, he should buy TROP

Most suited to ‘low risk appetite-high income’ category of insurers

You want to be financially independent all your life

You can afford to pay the high premium throughout your life, even when you get retired