If you are anything like most consumers in the U.S., you’ve probably not heard of return of premium life insurance. The insurance research group LIMRA, reports that return of premium term insurance only amounts to about 2% of policies being sold today. Even in its most popular year in 2009, return of premium term life insurance only captured about 5% of insurance sales. What is return of premium term insurance anyway?
Even though it lacks in popularity, return of premium term insurance (ROP) can be an excellent product because it offers very affordable life insurance coverage and a full refund if you outlive your policy. So you would think that insurance customers would jump all over it right? Wrong. There are many “naysayers” out there offering information that makes most people forget about a premium refund.
These naysayers, who are typically financial planners, tell their constituents that an insurance customer can earn more money by investing the increased premium for the ROP in the market and therefore, ROP is not a very good deal. That’s likely an accurate statement for someone who is investment savvy and concerned about the growth of their money. But what about all those hard-working people who pay income tax to the government and wait an entire year to get it back? Aren’t they like most of us who want to save but are not very good at it?
What Exactly is Return of Premium Term Insurance?
In an effort to compete with Universal Life’s cash accumulation benefit, companies offering term life insurance decided that they will give back all the premium a policyholder pays into their policy if the policyholder outlives the policy term. This way they can collect an additional premium that can be invested in the stock market and then give back what they don’t have to spend on paying claims.
Here’s How it Works
When you’ve decided to purchase a term life insurance policy, you can add the Return of Premium rider (option) for an additional charge that will be added to your monthly premium. For example, let’s take a 25-year old single male who wants to purchase a $250,000 30-year term insurance policy with a monthly premium of $20.00. If he dies during the term, his beneficiary would receive the $250,000 death benefit, but if he outlived the 30-year policy, the premiums that were paid in for 30-years are gone. That would represent $7,200.
If this same 25-year old male added the return of premium rider, his monthly premium would be about $98. If he died within the policy period his beneficiary would receive $250,000 but if he outlived the policy he would receive a refund of a little over $35,000 in a lump-sum payment that is tax-free. He could then invest this money in a retirement plan, pay down his mortgage, or take the family to Hawaii for a week or so.
Why Would I Buy the Return of Premium Rider?
This is the number one question that most people ask. Believe it or not, there is a large segment of the adult marketplace who do not save their money or invest their money. These are the folks who don’t mind overpaying their income tax each year because they look forward to a huge tax refund in February. There’s nothing wrong with them. Some folks are savers and some are not.
The return of premium term life insurance is a way to force save your money. Just like overpaying your income taxes during the year so you get a huge refund at the beginning of the following year. It makes sense for these folks and is actually pretty smart when you think about it. Someone who normally has social security as their only retirement plan now has an additional method to force themselves into saving.
The lump-sum refund is non-taxable and can be used for any reason you’d like. And let’s not forget, all that time they were “forced” to save some money; they were insured for $250,000. If the worst should happen, they would have still taken care of their surviving loved ones. And while we’re discussing this, if the policyholder wanted to cancel the policy before the end of the 30-year term, most companies would prorate the return of premium amount and still return some of the insured’s money.
So then, if our hypothetical insured outlived his term policy and invested the $35,000 return of premium into an annuity, he would receive about $450 each month on top of his social security income for the rest of his life.
Why Wouldn’t I Buy the Return of Premium Rider?
Certainly, return of premium term life insurance isn’t for everyone. In fact, all life insurance products only meet the needs of specific individuals in certain circumstances. Some reasons to not purchase the return of premium rider are:
- Earn More Investing the Additional Premium – For individuals who want more bang for their buck, they can typically earn a much higher rate on their money by investing in other products like a Roth IRA or even the stock market if they are up for it.
- Purpose of the Insurance – Many people by term insurance because it is a very affordable method to cover debts for a short period of time. If you are looking to make sure some short-term debts are paid if you die, then return of premium life insurance is not the best solution because of the additional premium for the rider.
- You Earn Zero Interest on Your Money – Remember, your insurer is going to invest YOUR money in the market, and they will undoubtedly earn a pretty penny doing so. You get none of that interest; zero, zilch, nada.
- Unaffordable Premiums – Return of premium works pretty well for young adults who are very healthy. If that’s not you, the premium is more than likely going to be unaffordable.
As with any insurance product, return of premium term life insurance isn’t for everybody. But, there are many cases, especially when the client is not a “saver” when return of premium is the best case scenario. It just depends on who you are, where you are financially, and how you feel about being forced to save money over a long period of time.