Life insurance: the zero-cost plan is not for everyone

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Some insurance companies have started offering what the industry calls no-cost term plans. While the name of this new variant of term insurance plans sounds appealing, policy buyers should be aware that it’s not literally zero cost.

Until now, there were two types of term insurance plans on the market: pure term plans and return-of-premium (RoP) plans. Pure term plans offer nothing if the insured survives the term of the policy. However, the candidate gets the sum assured if the person dies during the term of the policy. In contrast, RoP plans offer a refund of premium if the insured survives the term of the policy, but are more expensive. In an effort to address the limitations of these two categories of life cover, insurers have started offering zero-cost plans that fall between pure term plans and RoP plans in terms of functionality.

Zero-cost policies allow the insured to terminate the plan at a specific time and receive all premiums paid up to that point. However, this facility is only available for very long term plans. “Zero cost term plan is the widely used terminology for this feature. Practically, there are no free meals, there will surely be administrative costs, etc., attached to it in my opinion,” says Manju Dhake, Vice President, Insurance at 1Finance, a consulting firm in personal finances.

How a Zero Cost Plan Works
“It’s certainly a great flexibility offered. This benefit is offered as part of a normal term insurance plan – as a built-in feature at no additional premium. But you cannot exercise the exit option at any time during the insurance period,” explains Deepak Yohannan, founder of MyInsuranceClub. Suppose you take a zero-cost plan with a 40-year policy term, in which you can exercise the exit option in the 25th year of the plan. After discharge, you will recover all premiums paid while the insurance company is faced with this scenario:

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Received interest-free bonuses for 25 years
Knocks you off the books when you actually get a lot riskier (as you age).

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

The policy term prerequisite specified in zero-cost plans may be one reason why the premium is slightly more than pure term plans, according to Dhake. “The longer the policy term, the higher the premium for term insurance. However, you need to assess your needs, understand the purpose or objective of the plan, and then make a decision to enter whichever product best suits your life stage,” he suggests.

Should I buy it?
“If you’ve saved enough and no longer need life insurance coverage, it’s a good idea to collect your premiums and go on vacation. But if you’re using it to deal with a cash crisis, it’s a tricky decision because you’re giving up your coverage when you need it most,” says Yohannan.

Dhake says, “I suggest opting for the plain vanilla plan because term life insurance should be viewed from a protection perspective keeping the objective of investment or wealth creation with other financial instruments.”

Know the risks
It is best to purchase regular term insurance, as life insurance should be viewed as a tool of protection and not from an investment or wealth creation perspective.
The ability to exit and collect all bonuses is only available for very long term zero cost plans and that too only after a specified period of time

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