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nism-series-xb-trop-term-plan-return-of-premium-vs-pure-term[ INVESTMENT ADVISER (LEVEL 2) ]

What is the financial reality of a 'Term Plan with Return of Premium' (TROP) compared to a Pure Protection Term Insurance policy?

[ A ]TROP guarantees a 50% compound annual return.
[ B ]TROP charges 2x to 3x HIGHER annual premiums than a pure term plan to refund nominal premiums at maturity (earning a dismal 0% real return); an investor is mathematically far better off buying Pure Term and investing the premium difference in equity mutual funds.[ CORRECT ]
[ C ]TROP provides free life insurance with zero net cost.
[ D ]Pure term plans are prohibited in India.
Takeaway

The correct answer is B: TROP charges roughly 2-3x the premium of a pure term plan to refund nominal premiums (a 0% real return) at maturity, whereas buying pure term and investing the premium difference in equity mutual funds mathematically produces far superior terminal wealth for the same total outlay.

Derivation
A pure term plan is priced purely for mortality risk, making it the cheapest way to buy a given sum assured. TROP layers on a savings component that simply returns the sum of premiums paid (with no interest) if the policyholder survives the term -- since this refund isn't inflation-adjusted, its real value after 20-30 years is heavily eroded, effectively earning a 0% nominal, negative real return on the extra premium paid. The classic financial-planning comparison shows that investing the premium difference between TROP and pure term into a diversified equity mutual fund over the same tenure compounds to a materially larger sum than TROP's flat premium refund, which is the core insight this question is testing.
Why the others fail
A — TROP guarantees a 50% compound annual return.
Fabricated and implausible; no life insurance product guarantees a 50% compound annual return -- TROP's actual real return on the extra premium is roughly zero.
C — TROP provides free life insurance with zero net cost.
Contradicts the mechanism; TROP's premium refund is funded by charging significantly higher premiums upfront, it is not a free, zero-net-cost benefit.
D — Pure term plans are prohibited in India.
False; pure term insurance is a widely available, IRDAI-approved and commonly recommended product in India, not a prohibited one.