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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Life Insurance Products

Rahul, aged 40, buys a term plan with a sum assured of Rs 1 crore and chooses the 'return of premium' variant. Compared with a pure term plan of the same cover and term, which statement is most accurate?

A return of premium term plan costs more than a pure term plan of equal cover and term, because the insurer must fund a refund of premiums paid if the policyholder survives the term. The extra premium pays for that survival benefit.

  1. AThe premium is lower because the insurer pays back the premiums only on death
  2. BThe premium is higher because the insurer returns the premiums paid if he survives the policy termCorrect
  3. CThe premium is the same because the return of premium comes from the sum assured
  4. DThe premium is lower because the death benefit is reduced by the premiums paid

Explanation

In a return of premium term plan the insurer promises a maturity benefit equal to premiums paid, so it must charge extra to fund this. The premium is therefore materially higher than a pure term plan. The return does not come from the sum assured, and the cover is not reduced.

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