Perhaps you’ve heard return of premium life insurance can be used as an investment. But how does that work and how can you calculate your rate of return? And which term gives the best return on investment? Is it 15, 20, 25, or 30 year term? First, read my article here: ROP life insurance, for a quick understanding of life insurance with the ROP rider.
30 Year Term with the return of premium rider will offer you the best rates of return, to the tune of 5%-11%, tax free. Let’s take a 32 year old, non smoking male in good health, who wants a 30 year, $1 Million dollar face value. Using my quote form, you’ll see the lowest price without return of premium is offered by Western Reserve Life, $2500 annually. If you add Return of Premium, the premium is $3500 annually. The rate of return comes out to exactly 7.2%.
This is calculated by taking the total annual premium with ROP, $3500, then subtracting what the base 30 year term policy would cost without return of premium, $2500. What you’re left with is your true cost of the ROP rider, $1000.
If you were to take that money, $1000, and invest it elsewhere, say in the stock market, it would have to earn 7.2% year after year for 30 years to grow to $105,000 (your return of premium amount). This is a 7.2% guaranteed rate of return, tax free. The IRS generally considers your return of premium not taxable since you are just having your premiums given back to you. So 7.2% net would be equivalent to earning 9%-10% gross in a taxable investment. Where else will you earn nine to ten percent guaranteed for 30 years? Nowhere but with return of premium life insurance.
Generally speaking, the 25 and 30 year ROP products will earn a higher yield than 15 and 20 years. Also, you’ll get the best yield the younger you are. For example, I’ve seen clients in their early twenties earn upwards of 10-11%.
One caveat: You have to pay your premiums and keep your policy in force for the entire length of the term to get back 100% of your premiums. You should only consider 30 year term life insurance with return of premium if you are a responsible individual with the means to make your payments.
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