Tag Archives: return of premium

Regular Term Life Or Return Of Premium?

If you’re looking at term life insurance, you might be considering a return of premium policy. Return of premium policies are more expensive than traditional term policies, but you get all of your premiums back at the end of the term, assuming you’re still alive.

Determining whether return of premium life insurance is a good choice depends a lot on your own habits, goals, and tolerance for risk. Let’s consider a hypothetical situation of a 35 year old female who is looking for a $1 million, 30 year term policy. Let’s say she can purchase a traditional term policy for $650/year, or a return of premium policy for $1175/year.

If she buys the traditional term policy, she will spend $19,500 on the coverage over the course of 30 years ($650 x 30). This money is gone forever, but it has done its job of purchasing peace of mind for her and her family.

If she buys the return of premium policy, she will spend $35,250 on the coverage ($1175 x 30), but if she is alive at the end of the 30 year term, she will get the entire amount back. This option costs a total of $15,750 more than the traditional term policy, so the trade off between the two policies is what she could have done with that money if she had purchased the traditional policy instead.

Here’s where an investment calculator comes in handy. The return of premium policy will cost $525 more per year than the traditional term policy. We can use an investment calculator to determine what sort of return she would have to get on that money if she invested it on her own, in order to end up with at least a total of $35,250 at the end of 30 years (since that’s the amount she will end up with if she buys the return of premium policy).

There are numerous online investment calculators that you can use. Each person’s situation will be different in terms of taxes (ie, one person might choose to invest the difference between the premiums in a traditional IRA, with tax-deferred growth, while another person might put the money into a taxable brokerage account) so I’m focusing solely on the growth of the money without taking taxes into consideration. Here is an example of a simple calculator that you can use to determine the effective rate of return that the return of premium policy is giving you.? For our hypothetical lady, we can input 30 years, an initial principal of zero dollars, and an annual investment of $525.? We can reduce the tax rate to 0%, but if she is investing her money in a taxable account, that amount will have to be increased.? Then we can move the little blue arrow on the rate of return line until the investment total (in blue at the top of the calculator) gets to at least $35,250.? For our lady, this happens at 4.8%, at which point, her investment would be worth $35,324 after 30 years (if she invested her money in a taxable account, her rate of return would have to be higher to offset the loss to taxes).

So if this lady were to get average returns of more than 4.8% in another investment vehicle, she would be better off getting the traditional term policy.? But if she likes the idea of a guaranteed rate of return and forced savings, she might be better off with the return of premium policy.? The final decision will be up to you, but understanding the numbers behind the premiums will likely make the decision easier.

Term Life Insurance

Term Life Offers the Best Value

A term life policy pays out its face value only if you die during the selected term. Normally, if you have not used the death benefit when the term runs out, the policy expires. However, return of premium policies are becoming very popular as an alternative to typical term life insurance and even whole life and universal life policies. Building cash value with a permanent policy means paying high premiums (2 to 3 times as much for the same coverage). While an unused term policy can feel like a waste. Return of Premium (ROP) term is an easy and effective new solution that splits the problem down the middle. It starts out like term life insurance with one extra promise from the carrier: If you pay your premiums and you live, we’ll give you your money back. On a normal 20 year level term Colorado life insurance policy the ROP benefit may cost about 30% more, but that extra premium will effectively earn you a 6-7% return over the 20 years — just enough to earn you back everything you’ve invested. What’s in it for the life insurance company? Your loyalty. Colorado life insurance companies spend a lot of money to get your business, and only start making a profit if you stick around more than five years or so. ROP gives an incentive for their customers to stay for the full term. And, for those that don’t, the carrier made an extra 30% on those guys — and used some of it to pay you a solid return on your money for sticking around and living. So if you know that you are going to be insured for the entire term, then think about paying a little more for the ROP benefit and getting it all back in the end. We would be happy to give you the price of a term life policy and compare it with the same amount of ROP term and do the math to see if ROP term would be a good investment.