What policies offer return of premium?
There are three types of life insurance policies that will return all of the premium you’ve paid in at a certain point in the life of that policy. The idea is attractive. You use your term life insurance for the full 20 or 30 years and the you get back all of the money paid in, income tax free. You can also have a permanent policy, a no lapse guarantee universal life, that will offer you chances at the 20th* and 25th year to cancel the policy and, again, get a tax free return of your premium paid. Then there is whole life that used to have a cash value account that equaled the face amount of the policy at age 100. In more recent low interest times most companies have stretched that date out so the cash value equals the face amount of the policy at age 121.
So, is ROP having your cake and eating it too?
I guess that depends on how much you want to spend on your cake. If a 49 year old man in good health buys a $500,000 20 year term policy, the best price he can expect to pay is $775 a year, $68.20 a month for 20 years. At the end of the 20 years that person has had the coverage for his family, but like auto insurance, if he hasn’t used it then there is no money returned. If the same man bought a 20 year return of premium term he would pay $2985 a year, $262.68 a month. At the end of the 20 years he would get a full refund of $59,700. If you bail out early then you get a percentage of the full premium returned. For instance, if you cancelled the policy in the 10th year he would get back 59%, a refund of $17,760 on the $29,850 paid in. You have to wait to the end of the term to get a full refund.
With no lapse guarantee universal life, a policy that is guaranteed to age 121, using the same client he would pay $4843 a year. If he no longer had that permanent need or decided he couldn’t afford it anymore he has a couple of options. In the 20th* year he he would have paid in $96,860 and could cancel the policy and get half of the premium paid returned. By the 25th year he would have paid $121,075 in premium and could receive a full refund of that amount if he cancelled. While these ways to bail out could be very important in the right circumstances, it should be noted that those are the only two options to cancel.
I picked a random whole life policy and for the same client the annual premium was $9455. Cash value builds slowly and the premium is double the price of the universal life, but by the 25th year you would have paid in $236,375 and could cancel the policy and take your cash value of $242,235.
There is no magic about where the money comes from to have options to get your premium returned. You pay a much higher premium to have those options. Your money. Your choice. Let Hinerman Group help you put together the numbers to see if it’s the right choice for you.