Is Return of Premium Life Insurance Right For You?
Life insurance is meant to provide a source of income for your family or other beneficiaries when you die, but there are times when the cost of life insurance seems like a losing bet.
Premium payments can be burdensome for whole-life coverage (insurance that remains in effect for the insured person’s entire life), especially for younger workers who see themselves as likely to live for many decades to come. Even with term life insurance (insurance that covers a specific period of time), it’s easy to wonder whether the money you pay for coverage could be better spent, especially if you never have to submit a claim on your policy.
There is a third option, however, called return of premium (ROP) life insurance. It blends term life insurance elements with whole-life coverage elements and offers consumers a way to reclaim their premium payments if they outlive their policies.
How Return of Premium Life Insurance Works
Covering an initial term of 15 to 30 years, return of premium life insurance comes with premium amounts that do not fluctuate throughout the duration of the policy (known as level premiums). If at any time the purchaser dies, the beneficiaries of the policy receive guaranteed death benefits tax-free. If, however, purchasers outlive the policy term, they recover their premiums upon expiration of the policy. For example, a $1,000,000 policy bought for $1,670 a year over a 30-year period would result in a payout of $50,100 upon the expiration of the policy.
The cash paid back at the end of the policy is income tax-free because it is considered a refund.
While many employers offer some form of life insurance to their employees, ROP insurance can go beyond a basic policy and be offered as supplemental voluntary coverage. If an employee chooses ROP insurance, they would cover the additional costs of the policy and receive all premiums at the end of the coverage period.
Pros of Return of Premium Life Insurance
The most significant benefit of ROP life insurance is the assurance that the money you spend on it is coming back to you. The cost of paying for the insurance is negated by outliving the policy.
Return of premium insurance can be ideal for people who need life insurance to guarantee security for their dependents but are not willing or able to spend a lot of money for that security. ROP life insurance is also beneficial as a savings vehicle, allowing purchasers to accumulate a substantial lump sum by putting away small amounts over a long period of time, with the added benefit of protecting dependents should death occur.
ROP life insurance is especially favorable for younger workers who can obtain policies with terms well within their life expectancies, knowing they will have a large amount of money coming to them as they near retirement age.
Many Return of premium term life insurance products can convert to some form of permanent coverage without new underwriting. This is a valuable feature for clients if their health deteriorates and they need permanent coverage. There is also an option to forfeit the premiums for a fully paid-up permanent policy with a reduced death benefit at the end of the term period.
Cons of Return of Premium Life Insurance
The biggest negative associated with return of premium life insurance is the opportunity cost. While return of premium insurance is less expensive than whole life insurance, it does cost more than basic term life insurance. Depending on the policy, the insurance company may keep a portion of the premium payments even after the policy expires. The company will also keep any interest generated on premium payments. Also, the returned premiums may be diminished in value because of inflation occurring over the life of the policy. You must wait for the full term to get 100% of your premiums back.
Any extra money you spend obtaining Return-of-premium life insurance could arguably be put to better use in traditional investments, such as the stock market, where returns on investments are pocketed by the investor rather than the investment house or agency. Of course, much depends on market performance during the time period in which you are invested.
Also, the guarantee of returned premiums only exists if the insurance company remains in business. If the company goes out of business, you’re unlikely to get all of your premiums back—perhaps not any of them. You might not get all of the money you paid into the policy if you lapse on your premium payments or if you refinance your policy for any reason.
You need to be sure you have the means and discipline necessary to make on-time premium payments for up to 30 years and that it is not the sole contributor to an overall investment or retirement strategy—otherwise, you could just put money away in a savings account for 30 years.
Get Started Today
Return of premium policies offer a great way to enhance life insurance security while building a conservative long-term savings plan. For guidance on return-of-premium life insurance, contact Shepherd Insurance today to get started.
