If you'd like to have term life insurance in place to
provide for beneficiaries yet you're confident you'll
outlive the life insurance policy, you now have many
options for "return of premium" (ROP) term life insurance.
Under this type of life insurance policy, if no death
benefit has been paid by the end of your life insurance
term, you receive all your premiums back.
With a traditional term insurance policy, you buy a
coverage term, such as 15, 20 or 30 years, and pay a fixed
annual price. If you don't die within that term, your
contract ends and you receive nothing, having paid for the
"risk" that you might have died.
An ROP term life insurance policy gives you 100 percent of
your premium money back (it's tax-free) at the end of your
term if no death benefit has been paid. Or put another way,
"You can rent your insurance or you can buy it," says Alan
Lurty, Senior Vice President at ING.
How much will it cost me?
An ROP term life insurance policy will cost more than a
comparable traditional term life insurance policy, and
there is a significant range among insurers for that
surcharge, plus significant ranges depending on your age
and the length of term you want.
It will really pay to shop around for the best term life
insurance quote, but on the low end you can expect to pay
50 percent more than comparable traditional term life
insurance. So, for example, if your annual life insurance
rate for traditional term insurance would be $3,000, adding
an ROP option could bring it up to $4,500 annually. On the
high end, you might be looking at paying 150 percent more
over the base premium, so that $3,000 premium would become
$7,500.
Shoppers should also note that with a ROP term life
insurance policy, generally the longer the term the less
you'll pay out overall in premiums. So a 30-year ROP term
policy could actually end up costing less total money, at
the end of the term, than a 15-year ROP policy. How does
that happen? Because the 30-year term gives the insurer
more time to make its money back by investing your
premiums. So make sure you price out different term lengths
when getting a life insurance quote.
Generally, you will not be returned premiums for extra
riders you may add to the ROP term policy.
Who considers it?
The likely customer for ROP term life insurance is a person
who has the confidence he'll outlive his life insurance
policy. Or it could be the person who can't get over the
feeling that term life insurance is a "waste of money" if
the death benefit isn't paid out. ROP term life insurance
provides a way to hedge your bets no matter what happens.
What if I surrender my ROP policy early?
It's not wise to buy any life insurance policy if you don't
intend to keep up on payments. However, if you do surrender
an ROP term life insurance policy early, you will get some
of your premiums back based on a sliding scale if you've
held it for a few years. Check your life insurance policy
details about that sliding scale before you buy.
Many life insurance companies offer no premium returns if
you surrender your life insurance policy within the first
few years. Your life insurance policy will spell out the
rules for surrendering it, such as when partial premium
returns would start and the sliding scale for those returns.
For example, just because you're halfway through your life
insurance policy term doesn't mean you'll get half your
premiums back if you surrender it. The longer you keep it,
the higher percentage of premiums you'll get back, up to
100 percent at the very end of your term. (If you die
during your term, your beneficiaries receive the death
benefit without any premium return.)
Can I get it for less?
Life insurance companies such as ING and Genworth offer two
flavors of ROP term life policies, usually called basic and
enhanced (more expensive). Under the "basic" contract, you
pay a lower life insurance rate than an enhanced life
insurance policy because you get back less if you surrender
it early.
For example, if you bought ING's 15-year term life "basic"
ROP life insurance policy and surrendered it in year 10,
you would receive 30% of your premiums back. If you held
ING's "enhanced" 15-year life insurance policy for 10 years
you'd receive 60 percent back.
For either basic or enhanced life insurance policies you
always receive 100 percent of your premiums back if you get
to the end of your term.
Invest the difference?
Maybe now you're thinking that another option would be to
take the premium difference between traditional term life
insurance and ROP term life insurance and invest the
difference. Would you come out ahead at the end? It depends
mainly on your term length. Lurty of ING offers this
example: Say you're looking at traditional 30-year term for
$1,500 or ROP 30-year term for $2,000 annually. That's $500
a year you could otherwise put into investments. To equal
the money you'd get back from your ROP life insurance
policy at the end of 30 years, you would need to see an
investment return on the premium difference of about 7 to 8
percent. How well has your portfolio been doing? Lurty says
that with ROP term life insurance policies you don't have
to worry about "investing the difference" because it's
being done for you.
Note that the example is for a 30-year term. With
shorter-term ROP life insurance policies, like 15 or 20
years, you might indeed yield more at the end of the term
by investing the difference. And you would need the
self-discipline to actually invest those extra dollars each
year.
Of course, should you die within the term, only the death
benefit is paid out. Thus, don't view this as an investment
product.
Expect to see more return-of-premium insurance policies as
it catches on.
Companies selling return of premium term life insurance:
-American General Life Insurance Co.
-Fidelity Life Association
-Genworth Life & Annuity Insurance Co.
-ING Reliastar Life Insurance Co.
-Lincoln National Life Insurance Co.
-Pruco Life Insurance Co.
-Pruco Life Insurance Co. of New Jersey
-Transamerica Occidental Life Insurance Co.
-The United States Life Insurance Co. in the City of New
York
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Amy Danise is an editor for http://www.insure.com . Visit
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