A Brief Note on Zero-Cost Term Insurance Plan

A zero-cost term insurance is a plan with an exit option. Under this, it is possible for policyholders to exit the plan at a certain age or after having paid the premiums regularly for a specific number of years. 

Typically, in a zero-cost term insurance scheme, the premiums paid so far, excluding Goods and Services Tax (GST), will be returned to the policyholder. Generally, there are two variants of term insurance plans: regular term insurance and return of premium term plan. 

In a regular-term plan, there is no exit option available. So, in case a policyholder services the coverage period, nothing is paid out in this case. Similarly, in a return of premium term plan, the premiums, excluding GST, are paid back in case the policyholder survives the coverage period.

A zero-cost term insurance plan offers considerable life insurance coverage without any additional cost. For example, the sum assured could be as high as Rs 1 crore or more. Typically, insurance companies (insurers)  charge premiums only for the initial years of the policy term. In case a policyholder survives the policy term, these premiums are refunded. 

Also,  premiums paid towards zero-cost term insurance plans are eligible for deductions under Section 80C of the Income-Tax Act (ITA), 1961. In addition, the death benefit received by the nominee is tax-free under Section 10(10D) of the ITA, 1961 (under the old tax regime).  

However, before investing in a zero-cost term insurance plan, it is important to note that such plans provide coverage for a specific period, and the policyholder will not receive any benefit once the policy term expires.

Also, a zero-cost term insurance plan does not offer any maturity benefit. It means that in case the policyholder survives the policy term, they will not receive any benefit. 

Typically,  zero-cost term insurance plans have a limited premium payment term, often requiring buyers to pay the entire premium upfront or over a relatively short period. It is not likely to meet the financial preferences of those who prefer to spread premium payments over a more extended period or look forward to paying in installments.

In addition, such plans offer limited flexibility in terms of policy duration, premium payment frequency, and coverage amount. 

When a policyholder purchases such a plan, the policy terms are generally fixed, and there is no possibility of any alteration. This means that no customisation is possible in such insurance plans.

Moreover, there are strict surrender policies, allowing policyholders to surrender the policy only during a certain timeframe. In addition, the policy’s surrender value may be lower than other traditional insurance plans. 

Also, zero-cost term insurance plans tend to include no investment component and offer no returns or profits. A policyholder cannot expect any returns on the premium paid.