Early exit benefit in term plans allows policyholders to withdraw early, pays back premium

Term insurance policy buyers now have the option to exit the policy early and even get the premium back. And this convenience will come at no extra cost or difference in premium amount. Advertised as Zero-cost term plans, some term policies offer this feature through early exit benefit.

Early exit is a benefit that is similar to the terminal illness rider, premium break, etc., available on a term insurance policy. It is different from a term plan with a return of premium (TROP), in that it allows policyholders to discontinue their term policy within a specified window and get the full premium back, net of GST, paid till that point. Currently, three insurance companies offer this benefit on their term insurance policies.

In TROP, the full premium (excluding GST) is paid as survival benefit at the end of the policy term if the policyholder lives through the entire term of the policy. If the policy is surrendered mid-term, policyholders are paid the surrender value (assigned after the first two years).

TROP is an expensive feature as the premium on the former works out to almost double the premium on a regular term plan (see table). This is because the insurer guarantees a payout to the policyholder/beneficiary in TROP, unlike a pure risk term cover that only pays death benefit. Premature exit benefit, on the other hand, comes at no premium difference.

Exit benefit gives policyholders an option to terminate their term plan prematurely within a limited, predetermined window. But here is the catch: The duration within which you can discontinue the policy to get the premium back is 1-5 years and opens up when you turn 55-60 years, typically the age when you are closer to fulfilling your financial liabilities and may not need life insurance any longer.

So, instead of paying the premium for a longer duration as with TROP, you can terminate the policy a little before maturity and get back the premium.

Do note that the worth of the premium amount erodes each year on account of inflation. For instance, if the total pemium for a 40-year TROP of Rs. 1 crore paid over the policy term works out to Rs. 8 lakh, you will be paid back this premium in lump sum after the policy matures. However, if you were to consider inflation of 6%, the value of Rs. 8 lakh would be just Rs. 80,000 after 40 years. The same concept applies to the early withdrawal benefit too, but you would pay a much lower premium and for a shorter duration. Take note that if the policy is discontinued outside of the exit window, you will not get your premium back.

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