Is return of premium term life insurance the right choice for you? What about a permanent universal life policy that will return your premium if you decide you no longer need it, or can no longer afford it? So let’s bust one myth right away. A lot of people believe (hope) that return of premium means you can cancel at any point and get a full refund of the premium paid in.
The truth is that a full refund only happens at the end of your term policy, or in the 20th or 25th year of your universal life policy, so this assumption falls right into the reality of 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 of more expensive ROP term, is that most life insurance policies don’t stay in force to the end of the term. Life insurance can be put in force with the best of intentions, and it can also fall victim to a tight budget. Think about it. If all life insurance policies stayed in force, whether term to the end of the term, or permanent life insurance until death, rates would have to be much higher to cover the increased company exposure to mortality.
So think carefully about return of premium term before committing to it. If you’re not sure you will keep a term policy to the end of the term the ROP is the wrong product for you. If you don’t keep the policy to the end of the term you will have paid far more than you would have with a basic term policy. With the universal life version it’s more of an escape mechanism. The bright side with the universal life is it doesn’t cost more for the return of premium feature. The down side is that if you decide you want out at any point other than the 20th or 25th year, you lose everything you’ve paid.
Life insurance companies build their products, prices and business models knowing that most people will cancel their life insurance before the end as noted above. 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 term policy to the end or the universal life to one of the two magic years. 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. If you have questions or would like to see what options might fit for you, call or email me directly. My name is Ed Hinerman. Let’s talk
My 20 years of experience give me the knowledge and leverage to find reasonably-priced life insurance for people who have been declined or are paying more than they need to.
I think you hit the nail on the head as to where the ROP argument usually breaks down. In order to win you have to keep the coverage for the full length of the policy. Something that most don’t consider though is that you actually have to need that insurance to the very end to win as well. Otherwise you are wasting the portion of the premium that is going to fund the term insurance. Most of the return models assume that you earn the 5 to 6% by comparing the ROP product to the equivalent non ROP term product. What happens to that comparison if 15 years into a 30 year ROP policy you need half as much term insurance?
You’ve mentioned on your blog before about how you call your clients each year to see what’s up and what’s changed. Our life insurance needs fluctuate. We have more kids, we sell businesses, we get promotions, we lose weight, etc. When you enter into an ROP product you need to realize the flexibility you are giving up in exchange for the return you plan to get.