Return of Premium Term Life Insurance

2006-05-31

Return of premium term life insurance policies are the newest twist to term life insurance. But is it right for you? It depends on your goals. But first let’s explore this new option in term life insurance.

Return of premium, or ROP, policies are an attractive alternative to the standard term life policies for which you get nothing back if you outlive the contact term. ROP policies provide you with a return of the premiums you paid in if you outlive your contract. Term life insurance rates have dropped drastically over the last decade. For example in 1994, a 40 year old man couldn’t get a 20 year level term policy for less than a $1000 a year. Now that is not the case if you are in good health.

If you have an older term policy, you maybe able to switch to a new return of premium term life insurance policy with little to no additional cost and get your money back if you outlive the contract. You’ll need to contact your agent for policy details and to apply for coverage. You will also likely have to take a new medical exam, but if you are in good health it would be worth your time to check it out.

But is it a good investment? If you currently don’t have term coverage and will be applying for the first time, you may be better off going with a basic level term life insurance policy. A 40 year old male in good health today can get $500,000 of 20 year level term coverage for about $400 a year verses the $1300 an ROP policy will cost. The ROP policy will return to you $26,000 at age 60 when the contract expires.

If you brought the $400 a year policy and invested $900 a year difference for the next 20 years you would have accumulated the same $26,000 with only a 3.5% interest rate. Now, these numbers are just scenarios and you should submit an actual quote request to get accurate pricing details before ruling out the return-of-premium plan. For example a 30 year level term policy costs about double the 20 year term policy and would throw the “invest the difference” theory off and thus you would have to earn more interest to get the same result.

Also, if you drop your policy or it lapses before the contract term is up, you may only be entitled to a portion of the premiums paid in. You should have your agent thoroughly explain the policy provisions to you and then read your policy carefully during the initial grace period to be sure you understand it fully. The return of premium term life insurance policy may be a good fit into your financial portfolio while providing protection for your family if something unfortunate should happen.

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