When one thinks of buying life insurance, the traditional term insurance plan often comes to mind. These plans offer different time periods, coverages, and benefits to policyholders. 

However one of the major drawbacks of term plans is that there is no maturity benefit if you survive the policy tenure. It is only upon your death that your beneficiaries or nominees can claim the insured amount.

In such a situation, zero cost term insurance can be your next best investment. 

What is 0 cost term insurance anyway?

Life insurance companies in India offer zero cost term insurance to those looking for an early exit option. It allows you the benefit of withdrawing your entire sum assured within a predefined period while the plan is active or at retirement, whichever comes before. 

If you go for this option, all the premiums you have paid to date are refunded, excluding GST. Once you get the total refund, your policy will be terminated. Alternatively, you can continue until the policy matures with no cashback benefits. 

Alternate names of zero cost term plans are ‘no-cost insurance plans’, ‘early exit plans’, ‘special exit plans’, or ‘smart exit plans’. Read on to know more. 

How does it work?

A prerequisite when buying a zero cost term plan is knowing how long you will need the coverage. This assumption includes considering the age at which you will have no financial obligations like loans or credit cards. 

Additionally, there should be no financial responsibilities such as providing for your children as they would be supporting themselves by then. 

Ultimately, the purpose of this insurance plan is to ensure that you only pay premiums that are necessary in the long run. Instead, you can build your savings corpus or reinvest the same amount in another profitable investment later on.  

When you stop the zero cost term plan within the predefined time specified by the insurance company, you will receive a refund of all the premiums paid since the plan became active. This amount is calculated as follows:

Premium Refund = (Base premiums + Additional underwriting premiums + Loading for modal premiums) – (Rider premiums, if any + GST)
In this case,

  • Base premiums are the standard premiums for your zero cost term insurance plan.
  • Additional underwriting premiums are extra premiums calculated as per your lifestyle and health. They help categorize your profile as standard, substandard, etc. 
  • Loading for modal premiums applies to premiums paid monthly, quarterly, or semi-annually instead of annually.
  • Rider premiums are applicable for any additional covers you may have opted for.

Let’s understand this in detail with the help of an example.

30-year-old Hritik Chakraborty has purchased a zero cost term insurance policy. He lives with his parents and will be paying a premium of Rs. 20,000 + GST for 30 years. The insured amount he would get is Rs. 1,00,00,000.

Situation 1: Hritik dies within the policy term.

Assuming Hritik has paid all the premiums regularly, if he dies while the policy is still active, the insurance company will give Rs. 1,00,00,000 to his parents. 

Situation 2: Hritik is still alive when the policy matures.

Again, assuming he has paid all the premiums as required, if Hritik survives the policy term of 30 years, he will receive a lump sum of Rs. 6,00,000 (Rs. 20,000 x 30 years) at the beginning of the 31st year. This amount does not include any riders or GST.

Regular Term Plans vs Zero Cost Term Plans vs Term Plans With Term Plans With Return Of Premium

It is also useful to know that zero cost term plans provide the benefits of regular term insurance along with the return of premium benefit options. But there are some minor differences. 

ParameterRegular Term PlanZero Cost Term PlanReturn Of Premium Term Insurance
Maturity BenefitYou get no maturity benefit.You get a refund of all premiums that are paid.You get a refund of all premiums that are paid.
CostYou have to pay low premiums generally.Your premiums are returned at exit. You have to pay higher premiums as compared to regular plans.
Premium Refund on ExitThere is no refund of premiums on exit. You get the entire refund when your policy expires.You get the entire refund when your policy expires.
Major BenefitYou only get the death benefit.You get the death benefit along with premium refunds.You get the death benefit along with premium refunds.

Is zero cost term insurance good?

Zero cost term insurance was introduced in 2022 as an alternative to the above two plans. It should be considered if:

  • You want to exit the plan without paying any penalty.
  • You are a risk-averse investor who prefers a refund on their initial investment only (if you survive the predefined policy term). 
  • You are comfortable with higher initial costs and complexities.
  • You prefer a simple, cost-effective insurance coverage.
  • You are in your early 20s and can invest in a zero cost policy for 40-plus years or are under 45 years of age.
  • You are working as a salaried individual with limited disposable income. 
  • You are looking for long-term financial security that adds peace of mind. 
  • You want to safeguard your child’s education and career development in case you are not around. 

Factors to consider before purchasing a zero cost term insurance

If you are looking for the best zero cost term plan, do keep the following in mind:

  • Choose a life insurance provider based on their claim settlement ratio and authentic customer reviews. Do your research well. 
  • Be aware of the policy terms and conditions, especially any hidden costs.
  • Make sure the sum assured meets your loved ones’ future financial needs.  

To Sum it Up

Zero cost term insurance should be preferred by people seeking an early exit option at retirement or at an age defined by the insurer. Learn about the factors involved and whether it suits your profile. Click here if you are looking to purchase a zero cost term plan. 

Armourr Insurance Brokers is one of the leading insurance service providers, brokers, and risk managers of India. Our company is dedicated to helping you find the finest solutions to protect your business from risk exposures. Our dynamic team of experienced professionals is the driving force of our company. Their rich experience and diverse backgrounds help us to understand the requirements and risks of our clients better.

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