Are you looking to purchase life insurance but are confused as to what product is right for your specific situation? If so, don’t fret! I will be writing a series of blog posts describing the different forms of life insurance products available. The topic of this blog is Return of Premium Term Life Insurance.
What is Return of Premium Life Insurance?
Return of Premium Life insurance is a form of term life insurance that will refund 100% of the premiums paid if the insured outlives the term of the insurance policy. These types of policies are usually written for 10, 15, or 30 year terms.
Who would benefit most from this type of life insurance product?
Young adults would most benefit from this type of life insurance policy because they are more likely to outlive the term of the insurance policy and ultimately receive 100% of the cost of the life insurance refunded to them.
What is the downside to owning this type of policy?
Return of Premium Term Life Insurance is more costly than a traditional term life insurance policy. Let’s look at an example, a 29 year old woman in excellent health. For a standard 30 year term life insurance policy with coverage of $1 million dollars, the monthly premium is $71.01. For the same coverage on a return of premium term life insurance policy, the monthly cost is $101.55, which is $30.54 or 43% more expensive than a regular 30 year term policy. Over the 30 year period, the return of premium life insurance would cost $10,994 more than the traditional 30 year term life insurance providing the same coverage amount. While it is true that the policy owner would receive all premiums paid into the policy refunded to them once the term is up, this concept ignores the time value of money. The money refunded to the policy owner would be worth much less and thus have less purchasing power.
If you do die during the time the life insurance is in force, the beneficiaries don’t receive any additional benefits from the insured owning a return of premium policy versus a standard 30 year term life insurance policy. Thus, the policy owner/insured would spend 43% more for the very same coverage in this example. The policy owner could have put that extra money to good use by purchasing a higher coverage 30 year term life insurance policy.
If the return of premium term life insurance policy is canceled, the policy owner may lose most if not all of the premiums paid into the insurance. The policy owner would then have spent an additional 43% on the return of premium term life insurance product for nothing.
Is it worth the additional cost?
Return of Premium term life insurance, in my opinion, does not have any added benefits when compared with a 30 year term life insurance policy. Although this product might be more alluring to young adults who would in all probability outlive the term and receive their premiums back, the risk vs. reward isn’t worth the additional cost.
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Much better deal to invest that extra cost and you will have a nice nest egg at the end of the term.
When you consider getting a term life policy with an ROP, think about whether you can afford to pay more for your insurance. Because you have to pay more to get your premium back.
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