Have you ever heard of people investing in life insurance? One common way people do this is by adding a Return of Premium rider to term life insurance policies, which can generate an equivalent yield of 9-10%. In general, I have not always found that 9 or 10% is attainable. The typical yield varies from 5-8%, but there are some people who can get 9-10%. It’s true.
First of all, allow me to explain what I mean by a Return of Premium rider generating an equivalent yield of 9-10%. Assume you’re a 30 year non-smoking male in excellent health, purchasing a 20 Year Term Life Insurance Policy, with a $250,000 face value. At the time of this post (December 2008), the lowest available premium for you would cost $147.50 annually. If you were to add a return of premium rider, your annual premium would be $280, a difference of $132.50 per year from the base price. If you bought the ROP rider and at the end of 20 years you’re still kicking, you would get back $5,600.
So now, it’s simple math. You’re paying $132.50 per year extra to get back $5,600 in 20 years. If you took that $132.50 and were to invest it elsewhere, it would take an equivalent annual yield of 6.69% to accumulate $5,600 at the end of 20 years. And since this $5,600 is considered to be a return of premium, it will most likely be income tax free, making your 6.69% net return equal 8-9% gross return!
Now that we know how the Return of Premium rider works, who is best suited for? Who can earn 9-10%? After extensive study, using Compulife’s ROP Analysis software, I have found that the ROP rider is best suited for healthy, non-smoking males ages 18-25, who purchase the ROP rider on a 20 Year Term Policy. Their average equivalent yield is about 8%. However, the BEST equivalent yield available to them is an eye popping 10.24%, if they purchase a policy with a face value of exactly $250,000. That’s approximately equal to a 12-15% gross return on investment!
Try investing in the stock market and getting 12 or 15% guaranteed. I don’t think so.
Generally speaking, I have found that the older the insured is or the higher the face value, the lower the yield will be. Again, the average yield is between 5-8%, but if done correctly, it is received income tax free. Another important factor to be aware of is that the insured must pay the policy’s premiums for the entire term to receive 100% of the premiums back at the end of the term. Some insurance carriers offer benefits such as policy loans and paid-up additions, giving options to insureds who are unable to continue paying their premiums through the term.
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