Most life insurance agents try to push their clients into adding a return of premium rider to 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 (in your 20’s and 30’s) and healthy.
But the option costs much more as you get older.
The huge benefit of return of premium life insurance over straight term life insurance, is if you outlive the term, rather than getting nothing back, all your premiums are returned to you!
Quick Guide to Return of Premium Insurance
- How Return of Premium Life Insurance Works
- Return of Premium Options
- Is Return of Premium a Good Idea in My 40’s & 50’s
- Case Study 20 Year Return of Premium Insurance for 50 Year Old Male
- Genworth Return of Premium Insurance
- Where to Start
I’m an insurance professional, but admit I’m tired of paying premiums to all my policies with nothing in return.
I am unaware of any types of auto insurance, homeowners insurance, or health insurance policies that offer Return of Premium as does Term Life Insurance.
Simply put, if you live to the end of your selected term, such as 15, 20 or 30 years, and you have a return of premium rider (option) on your policy, 100% of your premiums will be returned to you.
… and since the insurance company is simply giving you back your premiums, you haven’t technically earned any money in the IRS’s eyes, so it’s tax free (although you’ll want to check with your tax advisor for details and if ROP works for you.)
Example of ROP in Action
Let’s examine if adding the ROP rider is right for you, beginning with an example 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 dollar life insurance policy. 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
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. In the event he lives through his 30 year term, 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!!
WITH ROP – $1,285 Annually X 30 years = $49,536
100% Returned to John
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).
Loans and Cash Value
While a level term product has no cash value, some ROP policies do. That means if you let the policy lapse, you may have a bit of cash surrender value, which may mean you will get some 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, it may be 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?
Perhaps you’ve heard return of premium life insurance can be used as an investment. But how does that work and which term gives the best rate of return on your investment? Is it 15, 20, 25, or 30 year term?
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.
The 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 term with $1 million dollars in benefits. 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) and 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).
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.
Update for 2016
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 it offers a guaranteed return of premium, is 100% tax free, and all the rider costs is the time value of money. 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.
Here is some additional information about the benefits of Return of Premium Life Insurance.
As you get older, the rate of return becomes less and less attractive.
It’s still decent if you’re in your forties. Say you are a 45 year old man in great health.
$500,000 Policy, 20 Year Term
- Base Price: $730 per year
- With ROP: $2,350 per year
- Interest Rate: 3.42% (that’s equivalent to approximately 5% in a taxable investment)
As I mentioned above, interest rates have changed since initially posting this article a few years ago. As of 2016, it’s not as good for getting a 5-8% return anymore, but still offers a guaranteed tax free 100% return of premiums.
Here’s a quote and explanation of a 20 year term return of premium life insurance policy. I sent this to a client recently. This gentleman is 50 years old in good health, and doesn’t use tobacco.
I’ve attached an analysis of the difference between buying a regular 20 year policy ($370K face value) and adding the return of premium option.
20 yr w/out ROP – $73.02/mth
20 yr w/ ROP – $155.03/mth
It ends up being a 5.74% annual rate of return. Or in other words, you’d be paying an extra $82.01 per month for the return of premium option, so if you were to go invest that elsewhere, it would have to earn 5.74% every year for 20 years to match what this ROP option does. The 5.74% is also income tax free, since the IRS sees it as a return of premium rather than an investment, so the 5.74 is net, not gross. It would probably be equivalent to an 8% gross rate of return. Not bad at all.”
Return of premium life insurance is a good option for people who can afford to regularly pay their premiums without fail. At the end of the term, if the insured hasn’t died, he gets all his money back. If you’re looking for term life insurance over 50, return of premium is probably not the best choice, even though it is still available. It costs about 4-5 x as much as the regular term. That seems like too much to ask just to get your premium back.
As you get older it becomes impossible. For example, if you’re looking for life insurance over 70, you can’t buy return of premium at all, unless you use a Guaranteed Universal Life policy with return of premium.
Effective in February 2016 Genworth has removed all of their life insurance product offerings, including Return of Premium products from the market. Anyone who purchased a policy with the ROP rider prior to their discontinuing of life insurance offerings, will still enjoy the same benefits guaranteed in their contract.
We still have several carriers offering Return of Premium products. The most competitive tend to be Sagicor Life and American General. You can get a quote for products with Return of Premium by filling out the form on the right hand side of this page.
VI. Finally a Policy you Won’t Hate… Life Insurance with Long Term Care and 100% Return of Premium
If you’re like me, you HATE paying insurance premiums. I can’t stand lining Farmers Insurance’s pockets year after year as I pay my auto premiums and never file a claim.
Perhaps you feel the way about long term care insurance. You know you need it, but are afraid you’ll pay into it for years and never use it. Wouldn’t that be a terrible waste of money! Well, my friend, I have good news for you. Finally Lincoln Financial came out with a life insurance and long term care product that we can all live with.
If you don’t use it, you can get your money back!
It’s hard to imagine getting excited about a life insurance product, but with 100% return of premium at any time during the life of the policy and long term care benefits to boot, the revolutionary, new Lincoln Money Guard Reserve is as exciting as it gets in the insurance world.
3 Key Benefits of LincolnMoney Guard Reserve
- Return of Premium: The Money Guard solves a big issue raised by opponents to return of premium life insurance… lack of liquidity. You see, with a traditional term life insurance policy, you could add a return of premium, and theoretically get back 100% of your premium, but not unless you kept your policy in force for the entire term. So say you bought a 15 year term policy and decided after 10 years you no longer needed the policy. You might only get back 50% of the premiums you’ve put in up to that point. If you cancelled the policy after just two or three years, you might not get back anything at all. As you near the end of the term, you get back a higher percentage. Not so with LincolnMoney Guard Reserve. You could deposit your premium today and later if you decide you no longer need the coverage, get back 100% of your premiums, whether it’s 5 years from now or 5 months from now, no strings attached (less any long term benefits paid out or loans & withdrawals taken, of course).
- Long Term Care: For a typical client (65 year old female, non smoker) a $100,000 single premium could provide up to $500,000 of long term care reimbursement benefits if she gets sick and needs care and the benefits are income tax free. I’ve read that 60% of people 65 and older will need some form of long term care during their life. The question is how will they pay for it? According to the American Association of Homes and Services for the Aging, the average cost for a private room in a nursing home is $77,745 per year, and the average annual cost of living in an assisted facility is $35,628. Medicare does not cover extended nursing home care stays, so you can see where an extra $500,000 could provide substantial protection for baby boomers’ and seniors’ nest eggs. Of course, the big difference between traditional long term care insurance and Lincoln Money Guard Reserve is that with the traditional variety, if you don’t use it, you lose it, right? With Money Guard Reserve, if you don’t use it, you can either get your money back or if you die without using it, your deposit blossoms into a life insurance death benefit.
- Life Insurance: Unlike traditional long term care policies, Money Guard Reserve clients don’t just get to use its benefits if they get sick. If they never use the long term care benefits, their beneficiaries will receive an income tax free death benefit. So let’s use the example above, a 65 year old, typical, female client – a $100,000 single premium provides $166,000 of life insurance.
I think the Money Guard Reserve would sell wonderfully if its only two components were long term care insurance with return of premium at any time, but this product also adds life insurance! Add the facts that there’s no medical exam and the policy gets issued in just a couple weeks and the Lincoln Money Guard Reserve is a slam dunk.
To give you some additional insight into return of premium insurance, watch this short video.
We cannot stress enough the importance of life insurance in your life. Choosing the right product at the most affordable possible price is best achieved through using the services of an independent life insurance agent, such as those at Huntley Wealth.
Independent agents have access to multiple companies. We know which insurers that offer the best rates when it comes to return of premium insurance.
Call us today at 877 – 443 – 9467 if you think you need life insurance because we can help!*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.