Understanding Zero Cost Term Insurance
Making waves in the insurance industry, Zero Cost Term Insurance seems to promise a term life insurance free of charge. However, it’s crucial to remember that in the finance or investment sector, NOTHING IS FREE and ZERO COST. Every service rendered incorporates some cost (either overtly or covertly), which unfortunately, many fail to recognize due to its hidden nature.
Defining Zero Cost Term Insurance
The primary concern for many term life insurance buyers is the fear of non-refundable premiums if they outlive their policy. Some view this as a net LOSS. In response to such perspectives, insurance companies had introduced return of premium term insurance products. These, however, proved to be more expensive than regular term life insurance. Hence, the industry innovated a fresh approach to address these apprehensions – Zero Cost Term Insurance.
Imagine, Mr.X, aged 30, purchases a Rs.1 Cr Zero Cost Term insurance policy with a tenure of 30 years. His annual premium amounts to approximately Rs.17,700 (including 18% GST). If after 10 years he decides to abandon his policy (due to financial independence or adequate corpus accumulation), he would receive a refund of Rs.1,50,000 (premium paid over ten years excluding GST).
If Mr.X opts to continue the policy for the entire 30 years and survives, he would receive Rs.4,50,000 (premiums paid over 30 years, minus the GST).
Whether you choose to discontinue halfway or complete the term, you get refunded the premiums paid (excluding GST). This feature has led insurance providers to market it as ZERO Cost Term Insurance, but remember, NOTHING IS FREE!
Which insurance companies currently offer Zero Cost Term Insurance?
Currently, limited companies like Bajaj Allianz, HDFC Life, ICICI Pru Life, and Max Life offer this feature. More companies might introduce this in the future.
What is the tax treatment of Zero Cost Term Insurance?
The clarity on this is yet to be provided by insurance providers. However, you can expect the premium refund to be tax-free, and premium payments are eligible for Sec.80C deductions.
Can you exit the policy at any point during the insurance period?
Unfortunately NO. There exist restrictions on exit points, such as after 15-20 years into the policy tenure, or a specific year of the policy term.
Comparing Zero Cost Term Insurance and Term Insurance
In both types, the nominee receives the sum assured upon the death of the policyholder during the policy term.
With Zero Cost Term Insurance, early exits return your paid premiums (excluding GST). In regular term life insurance, stopping future premium payments effectively ends the policy without any refunds.
If the policyholder survives until the end of the term, Zero Cost Term Insurance returns the paid premiums (minus GST). Regular term life insurance offers no such returns.
Though seemingly expensive compared to regular term life insurance, Zero Cost Term Insurance is cheaper than typical return of premium policies.
Negatives of Zero Cost Term Insurance
This feature, although tempting with its “ZERO” label, has more cons than pros. Thus, we shall focus on its disadvantages:
Remember, NOTHING IS FREE. While it seems affordable compared to return of premium features, it’s still pricier than non-return plans. The return of premium (whether zero cost or regular) is generally an undesirable feature when buying term life insurance.
Even though it’s suggested that you can exit mid-policy and regain your premiums under Zero Cost Term Insurance, there are stringent conditions attached to this exit option.
If uncertainty looms over the necessity of such significant coverage in the future, staggering your coverage through different term insurance policies with varying sums assured is recommended over this feature.
You may find restrictions on the coverage amount offered with this feature. Exercise caution while considering it.
The term “ZERO” doesn’t imply that the feature is FREE. It often costs more than traditional non-return premium term plans. The conditions attached to policy exit and premium refund are not always in favor of the policyholder. So, exercise discernment when opting for such features. It might be wiser to avoid them altogether.