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Term Life Insurance That May Pay Back Your Premiums
By: Noyescapital
"Would you like to buy term life insurance that pays back the premiums you paid
over the life of the policy?
Many people would love that deal. Perhaps they can’t afford permanent life
insurance with its investment component, or they hate “wasting” their premium
dollars on term insurance for which they’ll likely never collect any death
benefits because most don’t keep it late in life because it becomes so
expensive.
In recent years, insurance companies have promoted a concept called
return-of-premium term life insurance, which pays back in a lump sum all the
premium dollars insureds pay into their policy as long as they keep the policy
for its full term. It sounds like a good deal, but some financial planners and
insurance experts express caution.
Say you need a $500,000 term policy for the next 30 years. A regular term policy
with an insurer rated A+ would cost a nonsmoking male, qualifying for preferred
plus, around $410 annually, according to quotes provided by the online insurance
broker AccuQuote. If you lived to the end of the term, you would have shelled
out $12,300 in premiums, and the policy’s death benefits would not have been
paid out.
A comparable return-of-premium term policy would cost $605 a year, according to
AccuQuote. If you keep the policy in force the full 30 years, you’d get back all
$18,150—tax free—the you paid in premiums. Or looked at in another way, for the
$5,850 you paid in extra premiums, you’d get back the $12,300 in premiums you
wouldn’t have gotten back at all if you’d bought the regular term.
For some needing insurance, this can be a good deal. But there are some catches.
The first, of course, is whether you can realistically afford the higher
premiums. For our example, the annual
premiums for the return-of-premium policy are 47 percent higher than the
premiums for the standard term policy.
That difference jumps dramatically the shorter the term. A $500,000 standard
term policy for 15 years would cost $210 a year—but $1,035 for an ROP policy,
according to AccuQuote. That’s five times the cost! (ROP premiums are higher,
the shorter the term, because the company has fewer years to earn the money
necessary to pay back the premiums plus cover costs and profit.)
The differences are larger the older you are when you take out the policy. A
40-year-old who wants 15 years of $500,000 coverage would pay $285 for a
standard term policy, but six times that—$1,715—for ROP coverage.
Yet most financial planners strongly recommend that the first priority for life
insurance is to have sufficient coverage. If you can’t realistically afford ROP
coverage for the amount you need, but you can for regular term, you probably
should go with the regular term. You also don’t want the higher ROP premiums
derailing contributions to retirement plans or excluding other insurance needs
such as disability coverage.
Even assuming you can afford ROP, there is the question of whether you’ll
actually keep the policy for the full term. A few companies will refund a
portion of your premiums if you drop the policy before the term is up, but it’s
not a large portion. And if you surrender the policy in its early years, you
might receive no refund at all and even pay surrender charges.
Historically, holders of term insurance keep their policies for an average of
only eight or nine years before they either drop coverage or switch policies.
Yet over 20 or 30 years, you might go through some difficult financial times and
be forced to drop the steeper-priced ROP policy.
Some critics of these policies argue that people would be better off buying a
cheaper standard term policy and investing the difference that would have gone
to ROP premiums, particularly if they can invest in a tax-deferred retirement
account.
Proponents counter that many people are not disciplined enough to consistently
and wisely invest the difference. They claim you’d have to earn six to eight
percent annually to accumulate an amount equal to the amount of the return of
premium. Furthermore, that invested amount will eventually be taxed, unlike the
ROP refund.
Regardless, before plunging into a return-of-premium policy, talk with your
financial planner to see what is really the best option for you.
About the Author:
Noyescapital |
