What is Zero Cost term insurance? What is the difference between Zero Cost Term Insurance Vs Term Insurance? What is the catch in Zero Cost Term insurance?

Zero Cost Term Insurance

Zero Cost Term Insurance is nowadays making a lot of buzz. We feel that insurance companies offering the term life insurance at FREE of cost!!. However, the reality is entirely different. In the finance or investment world, do remember one thing NOTHING IS FREE and ZERO COST. Each facility offered involves a cost (directly or indirectly). Sadly many will not recognize upfrontly because such costs are hidden.

What is Zero Cost Term Insurance?

The biggest drawback to many term life insurance buyers is whatever they pay, they will not get back if they survive. They feel it is a LOSS. To cater to such individuals, earlier, there was an option called the return of premium term insurance products. However, they are costly compared to normal-term life insurance. Hence, insurance companies innovated one more feature to cater to such mindset buyers called Zero Cost Term Insurance.

Assume that Mr.X whose age is 30 years purchased Rs.1 Cr of Zero Cost Term insurance for 30 years. The yearly premium is around Rs.15,000 + Rs.2,700 (GST @18%) = Rs.17,700 he has to pay throughout the policy period of 30 years.

Now let us assume that after 10 years if he felt that he didn’t need this Rs.1 Cr term life insurance (maybe for various reasons like he may feel no one is financially dependent on him or accumulated a sufficient corpus), then he can stop the policy immediately. He will receive Rs.1,50,000 (Rs.15,000*10 years) of whatever premium he paid during the 10-year policy period. Do remember that GST is not refundable.

However, if he continued the policy for the whole 30 years and survived during this 30-year period, then he will receive Rs.4,50,000 (premium which he paid during 30 years excluding the GST).

Whether you discontinue the policy in between or at maturity, the premiums you paid are completely back to you (excluding GST), hence insurance companies branded this as ZERO Cost Term Insurance.

Fantastic right? Hold on…NOTHING IS FREE!! Let us try to understand more about this product with a few FAQs.

# Which insurance companies currently offering Zero Cost Term Insurance?

Currently, not all insurance companies offer this. As of now, only few companies like Bajaj Allianz, HDFC Life, ICICI Pru Life, and Max Life. In the future, others may join to offer this feature.

# What is the tax treatment of Zero Cost Term Insurance?

There is no clarity from the insurance companies. However, it is tax-free when you receive back the premium. However, the tax benefit is available under Sec.80C for deduction whenever you pay the premium.

# Whether you can exit the policy at any point of time during the policy period?

Sadly NO. There are restrictions to it like after 15-20 years of policy period, after 15-20 years of policy period but not during the last 5 years of policy period, or on a particular year of the policy term.

Zero Cost Term Insurance Vs Term Insurance

  • In both cases, if death happens during the policy period, then the nominee will receive the sum assured opted by the policyholder.
  • In Zero Cost Term Insurance, exit before the policy term ends is possible where you get back the premium you paid (excluding GST). However, in the case of normal term life insurance, to exit the policy, you just have to stop the premium payment in the future. You will not get anything back.
  • If the policyholder survives up to the policy period, then in zero-cost term insurance, the policyholder will receive the premium he paid (excluding GST). But in normal term life insurance, the policyholder will not receive anything back.
  • Cost of the zero-cost term insurance is high compared to normal term life insurance. However, cheaper than the typical return of premium policies.

Disadvantages of Zero Cost Term Insurance

This feature even though looks fantastic with the word attached to it as ZERO, has more negatives than positives. Hence, rather than discussing about advantages, I thought to highlight only the disadvantages.

  • As I have mentioned above, NOTHING IS FREE. This feature may look cheaper if you compare it with a return of a premium feature. However, still costlier than the plans which not offer a return of premium. In fact, the return of premium (whether zero cost or regular return option), is the worst feature one can choose while buying term life insurance.
  • Even though in feature of zero-cost term insurance, is mentioned that you can exit the policy during the policy period and get back the premium you paid, in reality, it is not the case. There are certain conditions to exit (as mentioned above). Hence, it is not a FREE exit as per your wish but it is an exit as per the insurance company’s terms and conditions.
  • If you are unsure of whether you need such a big cover in the future, then better to stagger your coverage by buying different term insurance with different sums assured of the term rather than opting for this feature.
  • You may not get the coverage you are looking for. Instead, there may be a certain coverage limit with this feature. Hence, try to look at it cautiously.

Conclusion – Just because ZERO is attached to this feature does not mean it is FREE. Instead, this costs you more than the typical simple non-return of premium term plans. Also, the exit from the policy to be eligible to get back the premium you paid comes with certain conditions and hence it is not a free exit as it is preached by the insurance industry. Hence, you have to be cautious while choosing such options. Otherwise, it is better to stay away from such features.

4 Responses

  1. I think the only feature to compare is what is the premium difference between zero-cost-term insurance plan and return-of-premium-term insurance plan. And the tax treatment of the money receiable when you exercise the option. GST in both the cases is an absolute sunk cost.

    1. Dear Kunal,
      Obiviously the zero cost term insruance premium is cheaper than typical retun of premium but comes with certain restrictions.

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