Return of Premium
You’re shopping for a term life insurance policy to protect your loved ones and out of nowhere someone tells you about a way that you can get all your money back at the end of the term if you don’t die. Sounds pretty good right?
Well, that depends once you delve deeper to see what’s the catch. In this article we will look at all the details about Return of Premium Term and who it can benefit.
Return of Premium Term Definition
It is a regular term life insurance policy that can be locked for 20 or 30 years but with an additional add on which is known as a rider. This rider simply states that if you outlive the term the company will return every single penny of the premiums you paid in. Contrary a regular term life insurance without the return of premium rider simply would terminate and not cover you any longer but you wouldn’t see any payments back.
What’s the Catch?
Cost
You may be wondering why in the world would anyone not go with the Return of Premium Option? The answer is cost and terms. What many individuals don’t realize is that the cost of return of premium term is typically 2 to 3 times that of a regular term policy. To demonstrate this let’s compare rates of both for a 40 Year Old Healthy Male looking for a 30 Year $500,000 plan:
Term Life
American General $54.84/mo
Term Life with Return of Premium
American General $123.28/mo
*Rate comparison from an independent online life insurance marketplace on August, 10 2017
That’s 2.2 more for the same policy and you may be wondering why such a big difference. It is simply because the life insurer will use your higher premiums to invest wisely so they can give you back your premiums and still make money on selling you a policy.
Contractual Agreement
There is another little catch if you wanna call it that which is that you have to keep the policy for the entire term to get the money back. This may not seem like a big deal but let’s really think about. The likelihood of anyone maintaining a regular term policy for 20 or 30 years is unlikely but when you have a higher premium policy like ROP term any unexpected life event like losing a job or getting disabled will put you in a situation where paying the premium might be the first thing to go. If this was a very affordable option it would makes sense but the higher cost associated with this makes this little caveat a bit of a nuisance.
Not all Companies Offer It
When it comes to getting a traditional term life insurance policy that’s focused on pure protection without any bells and whistles there are hundreds of carriers you can pick from but only a few show up for the ROP Term. Now, this is not a huge deal unless of course you’re looking for the most aggressive pricing which is usually found when you have a pool of options. Another issue may occur if you have pre-existing medical conditions and a certain company will offer you coverage but they may not offer ROP Term.
Alternatives to the Policy
You may be thinking of getting a regular policy and investing the rest but it will take pretty solid investment to get more return with the difference comparing to a total amount you’d get with Return of Premium policy. You may also look into an actual permanent cash value plan like whole life or indexed universal life since you’ll definitely get a higher return because your family will be collecting the death benefit at one point or another. In addition to that, these policy do accumulate some cash value that you can take out to supplement your retirement or pay for emergencies.
Summary
In summary, this policy may be a great option for someone who can afford it and simply views it as a forced savings. Because even though it has some downfalls for those that can pay those premiums easily they are essentially getting free life insurance. It may also be ideal for a business to get this policy on one of their key employees or partners. As you can tell by the tone of this article this policy may not be very popular or have that many advantages but it does have its place in the life insurance planning tool kit. That’s why we highly recommend that you sit down with an experienced agent to see if ROP Term is the best option for you based on your financial situation and policy needs.
