Return of Premium Term Life Policies Worth Exploring
To the relief of many consumers not satisfied with either of the two types of traditional life insurance, insurance companies have started offering a third option. This new product is called Return of Premium (ROP) Term and combines Term and permanent insurance features. The feature that excites buyers about ROP Term is that at the end of the policy’s Term, you get all your premiums back if you’re still alive! That’s right. Every cent you paid for the policy will be returned to you.
For many, deciding between the two types of traditional life insurance has been agonizing: Term or Permanent Cash Value. Term or Permanent Cash Value? The question can go around in one’s head like the hamster on the proverbial exercise wheel.
The premiums are less for the Term, but there’s no return on the investment unless you die during the 10, 20, or 30 years that is the policy’s Term, and your survivors collect the death benefit. With today’s long-life practicalities, it’s likely that you probably won’t die before the policy expires. You want to protect your dependents, but you may hate the thought of all those premiums paid and nothing to show for them if you live, which is what you reasonably expect to do.
On the other hand, you can build cash value with the savings component of a Permanent Cash Value policy — whether whole, universal, or variable. Plus, the guaranteed renewable feature is attractive since you don’t know what your health may be years from now. But Permanent Cash Value insurance typically costs two or three times as much in premiums as premiums for the same death benefit with Term. Should you spend more on life insurance for the cash value and permanent features? Can you afford to pay that much more? It’s a hard call for many.
What a relief to have this third choice of ROP Term, an elegant solution that splits the problem up the middle. It’s like Term Life Insurance in that the policy is effective if you pay your premiums for a specified period, usually up to 30 years. But it adds a cash value feature with the guarantee from the insurer: If you pay your premiums and you live, we’ll give you your money back.
On a typical 20-year Level Term Life Insurance policy, the ROP feature could cost from 25 to 50 percent more a year than a standard Term policy of the same period. The additional premium the insurer invests provides the cash for the returned premiums. It’s like buying traditional terms and investing an extra sum that will grow steadily without risk. It’s not “free” insurance but to the majority of people who — if they buy the coverage while still relatively young and consequently will most likely still be living at the end of the policy’s term — it sure feels like it is.
The most significant determinant of the extra charge for a Return of Premium feature is the time until you get the premiums back. A 30-year policy is less costly than a shorter one because there is more time for the additional funds to grow. A 35-year-old male in good health might pay $970 annually for a 30-year, $500,000 Return Premium policy. That’s $295, or 44 percent, more than the regular Term from the same insurer. A 20-year policy might cost $1,175, or more than three times the cost of a common term. A 15-year policy, at $1,645, is almost six times the cost of a traditional term.
Is the investment component of the ROP Term policy a good investment? By counting the extra premiums paid as the amount invested and the overall premiums paid back as the investment payoff, these policies pay annual returns of 2.5 to 9 percent–the longer the policy’s life and the smaller the extra premium, the better the return. And for many people, there’s an additional return in tax savings. If you invested the extra premium, the net gain could be taxable. Putting that amount into an insurance policy makes the total payback a refund of your premiums, thus not taxable.
You reap significant benefits from the ROP Term if you keep the policy for the entire Term. However, you can surrender the policy during the Term and get back a portion of the premium. Premiums are returned on a sliding scale that builds up to 100 percent at the end of the Term. So, if you take out a 20-year policy and cancel at year 15, you can expect to get back about 50 percent of your money. You’ll unlikely get any return on the premium if you surrender the policy within the first five years. Insurers only profit from your policy if you stick around for over five years.
What if you bought a car, made the car payments, and then when you’d finished paying for the car, you got all your car payments back? Who doesn’t think that’s a pretty swell idea? The new ROP Term Policy takes features from Term and Permanent Life Insurance and rolls them into one desirable alternative – just like getting all your car payments back when you finish paying for it.
