What is a 'zero' cost term plan? Who should buy it?

Vanilla term life insurance is the most preferred form of life insurance where in case of demise of the policyholder, the sum assured is paid to the nominee or the family members. While it is the least cost life insurance product available in the market, a market survey by Max Life Insurance found that a significant number of consumers fear that if nothing unfortunate happens, they would be wasting a huge amount towards the premiums paid for the term insurance by their retirement age. To cater to this particular segment of consumers, Max Life came out with a plain term insurance plan with an option to return all the premiums (minus GST) at the age of 65 or the 25th policy year, whichever is earlier, if the policyholder is liability free and healthy and is no longer willing to continue with the term insurance.

While most salaried class are willing to buy a long term coverage, says Vaibhav Kumar, head of product management, Max Life Insurance, they are unhappy with the plain term plan where if the policyholder outlives the policy term, he or she gets nothing from the policy. "For them, we came up with an option in our plain term insurance plan - Max Life Smart Secure Plus, to return all the premiums at age 65 years, if they no longer need the life insurance and find themselves liability-free and fit and fine," adds Vaibhav Kumar. The best part as per Kumar is that the policy does not charge any additional premiums for this option.

The policy term for such a plan, however, has to be 40 years or higher. Some other life insurers like Bajaj Allianz Life and others have also launched zero cost term plans. Bajaj Allianz eTouch allows the surrender of the policy at age 60-62 years. The plans are eligible for customers below 45 years of age.

"With zero-cost term insurance, you can inform the insurer to shut down your plan when you don't have liabilities or around retirement time, and the insurer will return all your premiums paid. Term insurance is the cheapest form of insurance and everyone should definitely invest in it. With such plans, it will become even more affordable for customers to opt for it," says Sajja Praveen Chowdary, business head, term life insurance, Policybazaar.com.

This policy is best suited for customers above 35 years of age, says Chowdhary, and aims to ensure financial protection to their family members in the long-term.

Zero Cost Term Plan vs Return Of Premium Plans

'Return of Premium' term insurance policies charge 70 to 80% higher premiums than a plain term insurance plan. However, unlike 'Return Of Premium' term insurance plans, Zero Cost Term Plans do not charge any additional premiums. These two are different categories of term plans. There is a major difference between the two, explains Vaibhav Kumar of Max Life Insurance, while in case of Zero Cost Term Plans, the insurance cover terminates as the policyholder surrenders the policy and asks for return of premiums, in case of Return of Premium term plan, the insurance cover continues even after return of all the premiums paid. That is why, he adds, Return of Premiums policies charge higher premiums.

Zero Cost Term Plans, believes Vaibhav Kumar, are suitable to salaried class whereas, Return Of Premium Term Plans are better suited for the self-employed segment.