Zero-Cost Term Insurance Plan: Does it make sense to buy one?

Noida (Uttar Pradesh) [India], July 3: Zero-cost term insurance functions by guaranteeing that your premium will be returned at a specific date, which will reduce your entire out-of-pocket expenses. Thus, in theory, you might purchase a term insurance plan, pay regular premiums for a predetermined number of years, and then cancel the policy and receive a full refund of your premiums at that point. It implies there is no cost to you in order to receive the advantage. But there's no logic to this. Why would an insurance company provide a free-term policy? Given that the majority of companies handle thousands of claims annually totalling hundreds of crores, how would they ever turn a profit? In this article, we will read more about zero-cost term insurance.

Exactly, how does zero cost term plan function?

A thirty-year-old individual wants to purchase a term insurance policy. In an attempt to close the deal, the insurance company offers the free option. The client agrees. Before providing one of these policies, insurance companies place a number of requirements on the policyholder.

The insurance firm will ask the person to purchase a policy that matures at the age of 70 or higher before they sign the contract. They will inform you that insurance with terms of 40 years or longer is the only one eligible for zero cost term insurance.

Additionally, they will inform you that you must give up or surrender the policy before the 25th policy year or between the ages of 65 and 66, whichever is earlier.

To receive their premiums, the 30-year-old will need to cancel the coverage as soon as they turn 55. Once you turn in the policy, it cannot be renewed and will be deemed terminated.

In summary, these plans are advertised as zero cost term insurance, but there are a few drawbacks, and they're not really free either. You could still be tempted to choose this option, though, because you can use it without having to pay additional premiums. Experts say if you want to purchase a term insurance plan, it is better to choose an insurance term according to your anticipated retirement age. For example, you can get a policy with a 25-year term if you plan to retire at age 60. In this manner, you would be covered until you retire.

Does it mean that term insurance plans are better?

A term insurance should cover your dependents and offer monetary benefits. Additionally, it doesn't make sense to get a term plan that provides coverage past your retirement age because, after retirement, your spouse and children won't often be dependent on you. Of course, you could go up to 65 or 70, depending on your needs, but it is better not to purchase a policy that extends above 70 due to the additional premium you'll probably have to pay and the general lack of benefits that come with a term plan.

Assume for the moment that you accept the plan and that it saves you some money annually. You receive a plan that meets all of your needs. But hold on! There's a free option that sounds too nice to pass up. They inform you that you must lock in for a minimum of 40 years in order to receive this terrific pricing. If you're 35 today, that may imply coverage until you're 75, even though you might only require it until you're 60. You may not realise it but the total cost increases as a result. Therefore, even though there may not be an annual premium, you might ultimately spend more money. 

Second, all of your premiums will be returned in full as a lump sum payment by the insurance provider at a future date. However, this does not cover the entire amount you ultimately have to spend to acquire and keep the insurance in the first place. The ₹10,000 that you spend in premiums does not equal the ₹10,000 that the insurance policy reimburses after approximately 25 years. Due to inflation, its current value could be as low as ₹2,000. Thus, keep in mind that there is an additional expense involved here that is not considered in your computation.

Not only that, but the insurance provider will only reimburse you for the premiums you paid them while the policy was in effect. The GST will not be reimbursed.

Lastly, since the majority of policyholders surrender their coverage before the policy's term expires, the insurance firm can make the zero-cost term insurance work. At the end of the term is when the majority of the claims surface. It is because of the increased mortality rates in older ages, that insurance firms must make significant payouts. However, companies may get away with paying a lot less if they can persuade individuals to surrender the policy much earlier. The insurance company always has the advantage in terms of economics. Thus, the query is: What are the actual advantages of purchasing a zero-cost plan?

Advantages of No-Cost Term Plans:

1. The majority of insurance providers provide this plan without charging you more.

2. You are free to exercise the option whenever you choose. You have two options: you can keep the policy until it matures or you can surrender it to receive the no-cost option. It's entirely up to you.

3. It's good to do it if you are purchasing insurance coverage in your early 20s and the term is 40 years or more.