Most life insurance agents try to push their clients into adding return of premium onto any term policies they purchase.
I don’t see it as a one size fits all option, however.
In general, it costs very little to add the rider if you’re young and healthy (20’s or 30’s), and costs much more as you get older. The huge benefit over straight term life insurance, of course, is that if you outlive the term, rather than getting nothing back, all your premiums are returned to you!
How Return of Premium Life Insurance Works
Let’s examine if adding the ROP rider is right for you, beginning with how return of premium life insurance works. Say John is 40 years old and gets a quote for a 30 year term life policy without return of premium, with a half million of coverage. He’s in good shape and is a non-smoker, so it costs him around $633 annually. If he pays his premiums for 30 years, doesn’t die, and lets the policy lapse, he’ll have paid $18,990, which he cannot recapture.
NO ROP – $633 Annually X 30 years = $18,990
Never to be seen again
WITH ROP – $1,285 Annually X 30 years = $49,536
100% Returned to John
If John decides to purchase return of premium life insurance, however, he’ll be adding and paying for a rider (an additional benefit) on his policy, so that in the event he lives the entire 30 years, he’ll get back 100% of his premium. So rather than paying $633 annually, his premium will be $1,285 annually. The difference between term life insurance with the return of premium rider and your ordinary 30 year level term policy, however, is that 30 years down the line, if there’s been no death, John gets back $49,536!!
As for the average cost to add the rider, as mentioned earlier, it’s cheaper in your 20’s or 30’s, sometimes only 30% to 50% more. But as you age, the rider can easily make the premium double, as in the example above ($633 no rider or $1285 with the rider). The rider also costs for for 15 or 20 year term than for 30 year term.
Return of Premium Life Insurance Options
Loans and Cash Value
While a level term product has no cash values, some ROP policies do. That means if you let the policy lapse, you may have a bit of cash surrender value (you get money back), depending on how long the policy has been in force. On a typical 30 year policy, cash values don’t begin accumulating until year 5, but they start off very low (like less than 1% of the premium you’ve paid). Every year, the percentage goes up, so in year 10, for example, if you were to let the policy lapse, you might get back 10% of the premiums you’ve paid… 20% in year 15, 35% in year 20, and so on, until you get to 100% in year 30.
It’s also possible to take out loans from your cash value, essentially paying you back for the premiums you pay. On a typical 30 year policy, you could essentially have your premiums reimbursed to you for the remainder of the 30 years starting in year 17. It’s important to understand that your loan will accrue interest, however, and that at the end of the 30 year term, you’ll receive substantially less than 100% of the premium you paid.
Is Return of Premium Life Insurance a Good Investment?
Some people look at their Return of premium life insurance as an investment. It’s actually not, but you could look at it like this: In our example above, John would have to pay an extra $652 per year for 30 years to get back $49,536. In the investment world, you’d have to earn a 5.7% annual yield to match that “return on investment”.
One very nice feature is that currently, the IRS views John’s return of premium of 49k as simply getting back his premium, so it’s 100% tax free! If you tried to earn 5.7% guaranteed in a taxable investment vehicle, you’d have to get more like 7 1/2 to 9%. So if you followed that, you can see why some people see adding the ROP rider as an investment, and a good one.
Update for 2013
This post is a couple years old, and the cost of adding the ROP rider has gone up a bit now, making the rider a bit less attractive. The fact remains, however, that offers a guaranteed return of premium and is 100% tax free. Just be sure to speak with an agent about your goals to see if it fits into your financial plan.
The Long Haul
Whenever I sell return of premium life insurance, I always remind people that to get back 100% of your premiums, it will require some perseverance. Your premiums will only be reimbursed if the insured is still alive at the end of the term AND you’ve paid your scheduled premiums every year. For instant quotes and lowest online premiums for return of premium life insurance, call us at 877-443-9467 or use the quote form on the right.*Written by Chris Huntley. Huntley Wealth Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser.