Return of premium term insurance provides coverage for a guaranteed period at a level premium and when you outlive the term, it gives you your premiums back. The annual cost is higher than straight term, but with term insurance you pay for coverage and if you outlive the term, well, you’ve spent the money for protection you needed. That’s not a bad thing. Both straight term and return of premium term have advantages.
I’ve mentioned more than once the AL Williams “buy term and invest the difference” theory as it compares to whole life. I decided to run that same comparison using return of premium rather than whole life.
So, we’ll assume we have a 35 year old male in preferred plus health. We will assume this guy lives somewhere other than New York or Utah. Both states are decidedly anti-return of premium. So, we’ll put the lucky guy in Illinois. He wants $1,000,000 of 30 year term. He has decided that AXA Equitable offers the best options for him.
For this scenario we will offer two options. The first option will be a 30 year return of premium term. The second will use the same premium amount and use it to purchase a 30 year level term policy and put the difference into a fixed annuity at 5.2%. Just in case anyone jumps all over that annuity, yes, I am aware that there are no annuities that can be guaranteed for that long, and yes, I am aware that surrender charges could be incurred and taxes will be paid.
The 30 year return of premium policy will be $1685.00 annually. If kept to the end of the term that will produce a tax free refund of premium in the amount of $50,550.
A straight 30 year level premium term would be $995, leaving $690 annually to invest in that annuity. At the end of 30 years, adjusting for taxes, but not adjusting for premature withdrawal penalties, the annuity would produce $40,700.
Bottom line. If you have the money to put into a return of premium product, the tax free status of the end refund makes it a choice worth looking at.
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