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.