Return of Premium Life Insurance

Return of Premium Life Insurance!

Is a return of premium life insurance policy as good as it seems?
Is there a better alternative?

What is ROP-Term life insurance? (return of premium)
Return of premium life insurance is a term life policy that can return your premiums! It is the ultimate win-win situation if you can afford the extra cost. If you the insurer passes on, your family receives the full value of the policy BUT, if you outlive the policy term you get a refund on all your paid premiums! ROP life insurance premiums can be higher than a traditional term life policy but the premiums are returned if your alive at term end, like a money-back guarantee! Alternatively, straight term life insurance ‘eats up’ your premiums and is wasted if you outlive your coverage period,
similar to car insurance. Which is why term life is viewed as a lose-lose proposition. You must die first to receive any benefit and if you outlive your term policy you forego any refund. But how nice would it be to get all your car insurance premiums refunded at the end of the year if you were accident free!

The redemption period for a ROP term life policy would be much longer than 1 yr of course (minimum 10 years, most insurance companies 15 yrs) but you get the concept. For example, say your 30 years old and you qualify for a 30 year return of premium-term life policy at $ 50 per month. At the end of the 30 years you receive a refund of $18,000 from your life insurance company tax-free! That’s a 100% return of what you paid ($50 x 12 =60 x 30 years= 18,000.) Sounds like a pretty good gig! What’s more compelling is more often than not the policy holder outlives a 20 or 30 year term period. To find out what your return of premium will be….

Is a return of premium life insurance policy as good as it seems?

On the surface this type of term life insurance seems like a “no-brainer” but there are several things to consider before signing up.

1. It will be substantially more expensive than a regular term life policy.

2. There is a stipulation to this “guaranteed” money back feature that return of premium offers: you don’t always get back
what you paid in. If you cancel your ROP life insurance before the policy expires, particularly if your policy has been in effect for five years or less, you’ll likely to see no premiums returned. Some policies will return a portion of premiums paid on cancelled policies held longer than five years, with the percentage increasing the longer the policy remains in effect.

 3. Your money will be tied to an insurance contract for years or decades to come.

Is there a better alternative?
It is really dependent on what your goals are. If you can afford the extra cost of return of premium-term life insurance but do not want to manage additional investments, ROP is a good choice. However, if feel comfortable investing your dollars into the outside market there is a better alternative. The better alternative is clearly buying a more affordable term life policy and investing the difference. To do this you must have the discipline to follow through and not spend the premium savings. You’ll remain in control of your money and likely end up with far more money in the end than just a return of what you paid. It’s impossible to know what opportunities or misfortunes may come your way; by investing the difference your dollars are not tied up into a life insurance policy. Even if you never receive any money back from your term life insurance, you’ll be able to consider yourself fortunate to have outlived your life insurance and you will have built up a profitable nest egg.

Looking for other types of Term life insurance? Decreasing term insurance