Posts filed under 'return of premium term insurance'
The question of return of premium term insurance has been viewed from a lot of angles in this forum, but today I think we need to switch our focus from the end of the term to the midpoint. There is, I believe, an assumption out there that a return of premium policy will return the premiums paid in no matter when you cancel it.
This assumption falls right into the same trap as most life insurance, the industry secret for why life insurance rates are so low. The reason rates are so low and the reason you need to truly think through the purchase of ROP term is that most life insurance policies don’t stay in force. Think about it. If all life insurance policies stayed in force, whether term to the end of the term (or converted), universal life or whole life, rates would have to go up to cover the increased company exposure to mortality.
The truth is that for a large percentage of life insurance purchasers, the whole idea kind of loses its’ luster when you’ve been paying for 5 or 10 years and nothing is happening. Especially for those who are still in great health, there is a tendency to start questioning the expense. My personal opinion is that those who fall into that mindset are selfish and need to simply get a grip (again), on why the life insurance is there and that the right thing to do is to stay insured.
Back to the ROP though. I was speaking a person today who was considering decreasing the amount of coverage they need in order to afford the extra expense of a return of premium. Their thought was to convert the policy in 15 years, halfway into the 30 year ROP and use the returned premium to help fund the conversion.
Life insurance companies build their products, prices and business models knowing that most people will cancel their life insurance before the end. I pointed out that in the early stages of the ROP term policy most companies don’t offer any return. It usually starts building slowly after the 6th year and usually doesn’t reach even 50% until the 25th year of a 30 year term. I think this illustration, return-of-premium-illustrated, will drive home what I’m talking about.
Bottom line. The only way to get 100% of your premiums returned is to keep the policy to the end. Considering the tax free status of the return, if you know you will keep it until you die or to the end of the term, the return can be ok especially given today’s economy. If you’re not sure, steer clear.
August 14th, 2008
This is certainly in the top 10 questions I get from clients considering what product will best serve their life insurance needs. When I explain that a 10 or 20 year term is really not designed or priced to go beyond those guaranteed periods I usually get the stock, “So I’m betting I’m going to die and the insurance company is betting I’ll live” line.
First, let me put that line to rest. Of course the insurance company believes you’re going to live. If they didn’t, they wouldn’t issue the insurance. Try to keep the focus that term life insurance is not about whether you are going to die (because we all do eventually), but rather is there a chance that you will die prematurely? And more importantly, will you die while there is still a need for the life insurance? In spite of companies like New York Life who don’t believe there are temporary needs for life insurance, the truth is that the larger amounts of insurance in our lives aren’t covering permanent needs. We do outlive them.
So, what happens if you outlive your term insurance? Well, job well done! You’re still around and you were able to provide insurance against the possibility of your demise during those years it was most needed. And you did it in affordable way. Do you get a prize? Again, you’re still around. That’s pretty cool stuff. This is way better than car insurance where you pay the premium and if you don’t use it, all you get is a used car with no repairs.
For those who just can’t get over the idea of spending money to protect their family and not getting anything back, there is always a permanent insurance like universal life or if you agree that the need is temporary, a return of premium term insurance policy. Again, I’m not convinced that the majority of life insurance needs are permanent so we’ll leave that discussion until another time.
So, if you can afford it, having your cake and eating it too with term insurance can be done through return of premium products. It is as simple as it sounds. When you get to the end of your 15, 20 or 30 year term, you get back all the premiums you’ve paid in. Keep in mind that while this sounds attractive, it comes with a glitch. The premium you pay is much higher than what you have to pay just for the insurance. I ran quotes on a customer this morning whose $500,000, 15 year term price was $875 annually. A $500,000, 15 year return of premium policy was a little over $2900 annually.
If you can safely budget 3 times as much money, and don’t feel like you can do better investing the difference on your own, this may be a way to consider. The gentleman I was providing quotes to this morning asked why anyone would buy straight term insurance when they could be guaranteed their premium back, and the honest answer is budget. I think it is always, and especially in these economic times, very important to buy what you can safely budget.
Bottom line. There is nothing wrong with having nothing at the end of your term insurance policy. You’ve done a good job and you’re still are around to enjoy the family you’ve protected.
July 7th, 2008
There is a common misconception that has floated around for the past 100 years or so of my life that if a person has cardiac problems, a heart attack, or coronary artery disease (CAD) requiring heart bypass surgery or an angioplasty, they are irreparably damaged in their ability to get life insurance, especially affordable life insurance.
This isn’t a simple thumbs up or down issue, but generally speaking in the absence of severe damage caused by a heart attack or chronic CAD requiring multiple procedures, insurability is not an issue. It will absolutely be at higher rates than someone who hasn’t had any cardiac issues, but affordable in most cases.
Some of the things that underwriters look for in heart attack cases would be:
1. Age of occurrence (better after age 50 than before)
2. Risk factors (obesity, high cholesterol levels, family history, high blood pressure, etc)
3. The amount of damage (usually measured on a stress test by the left ventricular ejection fraction (LVEF). Over 50% is insurable. Under 50% generally not, but would be weighed against offsetting factors.
In the case of CAD in the absence of a heart attack underwriters look at:
1. Age of onset (again, better after 50, not so good before 50, very challenging before 40)
2. Number of vessels effected (blocked). A single vessel blockage is better than what would be considered a more aggressive or pervasive multiple vessel blockage.
3. Again, risk factors. What underwriters are looking for here is whether your risk factors will tend to push you toward chronic CAD. If you have a good build and get plenty of exercise and do what it takes to control cholesterol and blood pressure, that’s a good thing. If you are overweight, don’t exercise and don’t get your cholesterol and blood pressure under control, the risk you pose to an insurance underwriter is much greater.
4. Underwriters will want to see a stress test usually at least 6 months to a year post procedure to determine the extent of any damage and how well the repair job went.
In spite of the myth, heart issues are insurable and usually at affordable rates. If you are applying for insurance, be prepared to answer the questions posed above. Know your cholesterol. Know your blood pressure. Know what meds you are taking. Know the date of your last stress test and get a copy of it. It is much easier for an independent agent to successfully shop for you armed with facts than being armed with generalities (the doctor says I’m doing fine). It would be a rare person who would know and a rare doctor who would discuss your LVEF. Underwriters have to know it in order to assess your application correctly.
Bottom line. If you’ve had a cardiac event, don’t throw in the life insurance towel. First and foremost, don’t go to your local State Farm or Farmers agent with your desire for life insurance unless you have a fondness for rejection. An independent agent will have access to companies that understand the underwriting of heart issues and provide your best possibility of success.
June 6th, 2008
Return of premium term life insurance is certainly a hot topic these days, so where do you turn to get an unbiased analysis of whether or not it is a good fit for your financial needs? I guess my best advice is simply to steer clear of anyone that thinks it’s the right answer for everything.
After years of analyzing ROP, it is very clearly not a one size fits all type of product. The premise is attractive. You buy term insurance and if you don’t die you get all the money you paid in back. Here is a Forbe’s magazine take on the idea.
forbes-return-of-premium
Forbes is clear about how the whole deal works. The insurance companies simply overcharge for the insurance allowing them enough extra interest earning excess that, even after paying back all the premiums at the end of 20 or 30 years, they make a handsome profit. The real frosting on this cake for the insurance companies is not that they got to use excess premiums for 30 years, but if they’re paying back the premiums that means they got out of paying “the big one”, the death benefit.
I don’t mean to infer that the insurance companies are getting their cake and eating it too. I believe there are certain instances where return of premium can be appropriate, if not purely the prudent choice.
The first place where I think this idea has some real merit is with younger adults. For instance if you take a young married couple around 30. Some would say buy whole life because term insurance won’t last long enough and whole life is permanent. Those are whole life agents and what they want is large premium, large commission and large renewals. But consider this.
People at 30 barely have a grasp of life insurance and certainly don’t have a handle on whether their life insurance needs are temporary or permanent in nature. They generally do have two things way in their favor, they’re young and healthy. I believe a 30 year ROP policy is a prudent move. Numero uno, it gets them insured. Second, the rate is locked in level for 30 years, into the years when they will in fact have a handle on what their real insurance needs are. Third, the policy is convertible so their youthful health rating is locked in for the full term and they can always convert all or part of the policy to permanent coverage. Lastly, at the end of the 30 years they have the option of taking a full tax free cash refund or rolling the returned premium into a permanent converted policy to drive the cost of the new policy down.
That’s what I recommend if you’re young. You can get a lot more coverage for a lot less money than whole life and the ROP policy has more flexibility and options.
Another perfect fit is key person business coverage. Often a company will carry a policy on a key person simply because they have economic value to the company. Their death would cause a financial setback that the policy can offset. A key person generally happens to be someone that a company depends on for a long time and would like to reward for their service upon retirement. So, the company can protect themselves and, if the key person lives to retirement, they can use the returned premium as a retirement bonus.
Outside of those two areas I think the product should be carefully weighed against your own ability to invest the difference between the premiums for straight term and ROP. Also, budget should be carefully considered. Does the increased premium stretch your budget or cause you to purchase less insurance than you need?
Bottom line. Return of premium is a product worth a look, but it isn’t right for everyone. A good independent agent should be able to crunch the numbers for you on all of the available options and help you make the right choice.
May 22nd, 2008
I field a high number of calls asking about whether people should buy term insurance, universal life or whole life, and in some cases they will have heard of, and ask about return of premium term insurance.
Now is not the time to hold back my feelings on this, so I am going to lay out the arguments I hear for not buying term and then you get to find out how I really feel.
1. But if I buy term and don’t die I will have wasted all that money…..
2. I want something that builds cash value so I can borrow against it……
3. What if I get to the end of my term and still need insurance……
I’m just going to address these questions in the most common scenario. Husband and father providing life insurance for the benefit of wife and children. For the average person in this scenario, your life insurance needs are not permanent. If you are in your 30’s or 40’s, married with children, most of your needs for life insurance will be gone by the time you are 65 or 70. Before you scream, I did say most, not all.
Unless you have a child that will be dependent on you for life due to a physical or mental disability, you have absolutely no obligation to carry life insurance for them past the point where they go out on their own. “But I’d like to leave them something!” Good! When they leave home, drop the insurance and start contributing to a retirement fund for them. In fact, if you bought term insurance rather than the other types you would have had enough money left over to be putting money away for them all along.
Sorry, I got emotionally off track. Wasted all that money?? You protected your family against disaster for all those years and that was a waste of money? You did it as inexpensively as it can be done and it was a waste? Try this for an exercise. Get gut honest with yourself and write down what you spend in a month that is just “blow money”. Money you spent that didn’t do anything but satisfy your desire at the moment. Beer, cigarettes, satellite TV, pay TV, new clothes when you have plenty already, sodas, snacks, eating out rather than cooking meals. Add all that up for a month and in most cases it will come to more than it would cost to very adequately insure yourself with a 30 or 35 year term policy.
But you say you don’t want to give all that stuff up? Do you get your money back when you’re through blowing it? Did it protect your family?
You want to buy whole life insurance so you can borrow against the cash value. Just two quick points. The cash value comes from you. Whole life is not a magic money machine. And, you have to pay it back or your policy will either collapse or the death benefit will be smaller than you intended. Ok, three points. You can’t afford to adequately insure yourself with whole life insurance. So, you want to put your family at risk by underinsuring so that you can borrow against the policy and possibly make the death benefit even smaller or nothing at all?
If you get to the end of your term and still need insurance, it will likely be a small amount having outlived children, jobs and mortgages. Once you are past the big three of life insurance needs, a small universal life policy should suffice, and you can convert that from your term policy without evidence of insurability.
Bottom line. Talk it through. Think it through. Don’t throw money away.
February 26th, 2008
I swear, where a year ago I was thinking New York would probably miss this century also, they have now rocked the life insurance world by approving return of premium term insurance for sale.
Return of premium has been available in the rest of the country for years, but today ING Reliastar the first ever ROP products in New York. Until this release New Yorkers were left only to wonder what it would be like to use term insurance for protection, and having outlived it, get a full refund.
Forbes ran article almost three years ago extolling the virtues of ROP (every where but New York and Utah). Attached is that article.
forbes-return-of-premium.pdf
While there isn’t any doubt that the younger you are the more attractive the product becomes, it can still fill needs that no other products can. For instance, a key man business insurance policy. You can use a return of premium policy as an insurance/bonus program. If the key employee dies, the money is there to help the company through a transition phase. If the key employee lives, the company can bonus the tax free premium refund as a retirement gift.
Bottom line. Let’s all welcome New York to the rest of the country. Past due, but welcome. Question now is, will Utah ever jump on board. Don’t hold your breath.
February 21st, 2008
This is one fascinating world we live in. I see so many people that bend over backwards to make sure that no matter what happens, their family will not miss a financial beat. They recognize and care deeply about what would happen if they didn’t show up at the breakfast table tomorrow.
On the other side of the coin are those who I swear, if all they had to do was take an exam and the life insurance was free, they would find an excuse to make it too hard to accomplish. Nooo, I don’t have free life insurance! And I’m not leading up to return of premium term insurance. But, honestly, I’m not sure it would make any difference in those who are on the don’t need it side of the fence anyway.
I would get a lot more customers from the need it and want it side. Those that already see value would see an extreme vlaue and jump on it.
Bottom line. Just whining. It’s not that I don’t have plenty of business. It just rubs me the wrong way to see people turn their backs on their responsibilites.
January 10th, 2008
I’ve talked in the past about a product called return of premium term insurance. It is often touted as “free life insurance”, because if you outlive the term insurance you get a refund of all the premiums paid in. A little more comprehensive take is in the attached Forbe’s article on the subject.
forbes-return-of-premium.pdf
That is not to be confused with employer offered free life insurance. I always recommend that you take part in any offer of free life insurance to bolster your portfolio. I also always caution against making anything free be the foundation of your life insurance plan. The reason is that, if it’s free, it’s a benefit that can be taken away, or lost if you leave a job. If you counted on that as your foundation, you could be caught in a situation where your family isn’t covered for a while. If your health has changed, you may not be able to get them coverage at all.
I recently structured a program for a company in which each employee was offered the chance to get $50,000 worth of free life insurance. It was owned by the employee and paid for by the employer, so if a person left that job they would have the choice of keeping the insurance simply by taking over the payments.
I was explaining the offer to one of the employees and he indicated he wasn’t interested. When I asked why he wouldn’t be interested in free life insurance he was adamant about the fact that $50,000 wasn’t enough to be of any value, so he would just pass. I still shake my head over that one.
If I was offered $50,000 of free life insurance and my family didn’t need it, I would make the beneficiary of the policy my church or some charitable organization, or perhaps just a friend. $50,000 may not have seemed significant to him, but how many people or organizations would benefit tremendously from a gift that size.
Bottom line. If it’s free, take it! Just don’t put all your eggs in a free basket.
December 10th, 2007
New York state’s insurance department is inching their way toward the 1980’s in their life insurance product availability. You would have to live there to appreciate (or not), just how antiquated the mortality assumption logic is.
A good example, probably the prime example, is that up until just a few years ago, term insurance in New York couldn’t have a guarantee beyond age 75. Even when the rest of the country had gone to age 80 and then 85, New York held fast. They finally broke through and allowed term to age 80, but no one is holding their breath to see if they will go to 85.
New York and Utah are the only two states not to fully embrace return of premium term products. Outside of those two states there are probably 40 different companies that offer ROP. In New York and Utah, one each.
New York was the last state to adopt universal life with a no lapse guarantee, one of the best permanent products available. They are just now issuing guidelines, and strict guidelines at that, on equity indexed universal life.
Equity indexed universal life, if built on a no lapse guarantee shell, is the same as other UL’s with the added perk of a larger potential (non guaranteed) upside on cash value accumulation. Just a word of caution with any universal life product. Look at the guaranteed side of the illustration and if you can’t live with what it says, ask for a different product. I personally don’t recommend anything but a fully guaranteed UL, with a death benefit well beyond age 100.
Bottom line. New York may break into the 21st century one of these years. When they do, they’ll probably still be 20 years behind, but progress will have been made.
November 15th, 2007
In a post a few days ago I talked about the fact that women in business have several reasons to consider life insurance. On a site called Women’s Initiative , they presented a list from an article in the Birmingham Business Journal, of statistics about women in business.
As I read through that list it struck me that women may have already taken over the world and that their need for business life insurance is certainly as large as I had insinuated, and really more far reaching.
Left out of my thought process were women majority owners of stock companies. Life insurance has long been a key tool in keeping control of a stock company in the event of the death of a major stockholder, through the use of a policy for stock re-purchase.
Women as key persons in a business should be insured to offer stability to the business if there was an untimely death. Creative use of a return of premium refund policy can set that up to protect the company and reward the employee if they outlive the need for it.
Bottom line. Women are a powerful force in large and small business and they should seek counsel as to the best ways to put in place a business succession plan.
September 7th, 2007
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