Today’s life insurance policies often come with many bells and whistles, offering policyholders some options that might even sound too good to be true. One case, having all of your premiums returned if you survive the term of the policy, may be a prime example – unless you know where to look for the hidden costs.
You may not be aware, but you have more than a hundred options to choose from when it comes to carriers, but not all of them offer an ROP policy.
When you’re talking to an insurance agent, it’s easy to get wrapped up in all of the jargon. If you don’t know what they are talking about, you can get tricked into buying a more expensive policy for protection or add-ons you don’t really need.
Below we’ll tell you everything you’ll need to know about the product, available companies, and rates you can expect to pay.
What Is Return Of Premium Life Insurance And How Does It Work?
Return of premium life insurance is a type of coverage that will return the premiums that were paid in for the coverage if the insured on the policy survives throughout the entire “term,” or time period, of the policy.
With this type of policy, you are guaranteed that either your beneficiary will receive the death benefit or that you will receive your premiums back. Oftentimes, these plans are marketed to those who believe that term life insurance is the best type of coverage to own, yet don’t want to take the chance that they will pay premiums into the plan for years without any type of return should they outlive the term of the policy.
When an individual purchases a term life insurance policy, the coverage will typically range from between 5 and 30 years. The premium that is due for this coverage is based on the insured’s age and health status at the time that he or she applies for the policy.
If the insured were to pass away during the time that the policy is in force, the named beneficiary (or beneficiaries) will receive the death benefit proceeds. If, however, the insured remains alive past the policy’s stated time frame, or term, then the coverage will expire. In this case, there are many insureds who feel that they will have “wasted” their premium dollars.
In fact, one of the most common reasons people won’t buy another insurance policy is because they paid for the first one, and when the term was over, they thought about all the money they could have “saved” by not having an insurance plan in place.
Even if you don’t have to use your life insurance policy, you still need to have one.
Factoring In Opportunity Cost
While return of premium policies do provide the chance to receive one’s premiums back, they do so at a higher premium cost up front. Therefore, before going headlong into a return of premium life insurance policy, it is important to factor in the opportunity cost of the additional funds that you will need to put forth into the policy in order to obtain the guarantee.
The example below shows the quotes for a $1 million term life insurance policy quote for a 35-year old male who is a healthy, non-smoker. These figures show both the premium cost of a regular term insurance policy, as well as the premium cost of 15, 20, and 30-year return of premium policies.
As it can be seen here, while the return is not negative, it is still barely high enough to beat the historical rate of inflation. Given this information, in most cases, it would make more sense for an individual to purchase a regular term life insurance policy and invest the “difference” somewhere else.
|Years||Annual Term Cost||Annual Cost of ROP||Difference||Total Premium||Return|
Other Criteria To Consider
In addition to pure return, there are other criteria to consider as well when determining whether or not to go with a return of premium life insurance policy. Other factors should include:
Loss of Flexibility
There may come a time throughout the term of your policy when you come across a cheaper form of coverage. Unfortunately, with a return of premium plan, you are essentially “locked in” for the long term. This is because if you cancel before your policy’s term is up, you lose the guaranteed right to receive your premiums back.
The Insurer Themselves
The insurance company making the guarantee is also important because if it were to go out of business, it is highly unlikely that its policyholders will get all of their premiums back – and possibly even not any of them.
As you can see from the quotes above, a standard non-ROP policy is drastically cheaper. But these are only quotes from a single carrier. Every carrier will have a different method for determining their insurance rates.
Not every carrier will have as drastic differences, while others are going to have an even wider gap.
When you’re deciding which kind of policy will meet your needs, you need to consider other carriers. If you were shopping for a home or car, you aren’t going with the first one. Why would you pick the first insurance carrier you came to?
The Bottom Line
Although return of premium life insurance may at first appear to offer you a nice guarantee, it is important to thoroughly understand how the product works, as well as whether or not you are truly receiving any real benefit at all. In most cases, this type of policy will cost more in up-front premium due to its return of premium guarantee.
In addition, in many instances, even though you may receive your paid-in premiums back, you will either break even – or even lose a small percentage of money due to inflation. With this in mind, you should make a careful comparison with how much could be earned if you invested the difference in premiums into a safe, long-term investment where you could access your money regardless of whether or not you keep your life insurance coverage in force.
If you have questions about how we might be able to assist you moving forward, please contact us.
As we mentioned in the “other criteria” section, you need to look at other carriers. There are a lot of companies who sell ROP term insurance plans. We don’t expect you to examine each one.
You don’t have to become an insurance expert to secure the cheapest premium. We can do all of the digging and comparing for you. All you have to do is use our quote tool and then you can browse all of the carriers and policy options.
Instead of going company to company, use the link below. All you need to do is to answer some simple questions. In a matter of minutes, you’ll have quotes from the biggest companies.