Although Return of Premium Term Life Insurance entered the insurance market with a “Bang,” the interest has begun to wane as many financial gurus condemn the product as being overpriced. These gurus who opine regularly about the additional cost of the return of premium (ROP) are typically guilty of painting all insurance shoppers with a broad brush. Ordinarily, their argument is that a policyholder could have invested the additional premium for the rider and done much better in the long term.
For many insurance shoppers, this may be true, especially for older adults who are typically just looking for the cheapest life insurance available. It may also be appropriate for savvy investors who are typically much more diligent when it comes to accumulating wealth through investing over time. But, there is a large group of consumers out there who should consider return of premium term life insurance as a legitimate solution for purchasing low-cost life insurance and investing an additional amount of money at the same time.
The group of consumers being referred to here is hardworking young adults who simply do not have the time or diligence to grow their money using traditional investment products. Here, we’ll discuss return of premium term life insurance and why it can be an investment product that can work for you.
What is Return of Premium Term Life Insurance?
First, we need to understand exactly what this insurance product is. Certainly, most consumers are aware of Term Life Insurance and understand that it is the most economical life insurance product available in the marketplace. The term “Return of Premium” is the name of a rider that can be added to a term life insurance policy for an additional premium.
What the Return of Premium (ROP) rider does is provides for the insurance company to return all of the premiums you’ve paid on your term life insurance policy if you outlive the policy term you selected. No, you do not earn interest on your paid premium and yes the insurance company does. Since the insurance company is earning interest on the cost of the ROP rider over a long period of time, they are willing to return the premiums you paid in. And, by the way, returned premiums are non-taxable to the policyholder.
Here’s an Example of Return of Premium Term Life Insurance
Richard is a self-employed hardworking husband and dad who just can’t seem to save much of his paycheck for his retirement. He knows he needs to buy some life insurance to financially protect his family if he happens to die unexpectedly and has decided to speak with his agent about getting a term life insurance policy in place. Mark, his agent, after speaking with Richard about protecting his family and investing in his retirement talks to Richard about Return of Premium Term Life Insurance and how it may be the solution for financially protecting his family and saving for the future at the same time.
Here’s what Richard’s insurance agent proposed:
Richard’s agent suggested that he should buy at least $250,000 life insurance coverage and then add the ROP rider. The premium for the life insurance and the ROP rider would be $112 per month which Richard feels he can afford.
Since Richard is 30-years old, his policy would provide $250,000 in life insurance coverage for 30 years. If Richard should die during the policy term, his beneficiary would get the $250,000 death benefit tax-free (problem #1 solved).
If Richard is alive at age 60 (when his policy expires), he would get a check for $40,320 which is also tax-free (problem #2 solved). Richard could then invest the $40,320 in an annuity or other financial product and supplement his retirement income when he decides to quit working.
Why Doesn’t Everyone buy Return of Premium Term Insurance?
When we compare the consumers who buy return of premium term life insurance with those who don’t, we typically see a difference in the type of consumer and the age of the consumer:
- Those who buy term insurance with the return of premium rider are typically not dedicated or even skilled at saving part of their income for future needs.
- Those who do not buy term insurance with the return of premium rider are typically more diligent about saving for the future and understand that they can take advantage of investment products that will produce a higher return.
- The age of the applicant can also have an impact on who will or will not buy term life insurance with the return of premium rider because the rates are more affordable for young adults.
Here’s a comparison for two 40-year old healthy males for a $250,000 30-year term insurance policy:
What are the Pros and Cons of Return of Premium Term Life Insurance?
Certainly, there are advantages and disadvantages with any type of life insurance product. Not because the product is flawed but because everyone has different needs that life insurance can resolve. Since the needs are different, the solution (the type of product) will be different as well.
Advantages of Return of Premium Term Life Insurance
- If you should die while your policy is in force, your beneficiary would receive the full death benefit of the insurance policy. This would not be the case with other traditional investment products.
- Consumers who are not as disciplined as they should be when it comes to saving for the future are forced to save when they use return of premium term life insurance.
Disadvantages of Return of Premium Term Life Insurance
- If you elect to cancel your policy during the policy term, you would not receive any money back as you would with Whole Life or Universal Life Insurance (some companies will pay a pro-rata portion of the premiums back if you elect to cancel very close to the end of the policy term)
- The cost for Return of Premium Term Life Insurance can get very expensive depending on your age at the time of purchase. Most companies start with an additional premium of around 50% that can easily increase based on your age.
- You will probably earn a higher return on the additional premium you pay for return of premium term life insurance if you invest in other traditional investment products.
What is Best for You?
Most large life insurance companies offer return of premium term life insurance but the product can differ among different companies. This is when you can rely on the expertise of your independent agent like InsuranceQuotes2Day. Independent agents typically represent all of the top-rated insurance companies and among them can find the best solution for your individual needs.