Premium payments can be burdensome for whole life coverage (insurance that remains in effect for the insured person’s entire life), especially for younger workers who see themselves as likely to live for many decades to come. And even with term life insurance (insurance that covers a specific period of time), it’s easy to wonder whether the money you pay for coverage could be better spent, especially if you never have to submit a claim on your policy. There is a third option, however, called return-of-premium (ROP) life insurance, that blends elements of term life insurance with elements of whole life coverage and offers consumers a way to reclaim their premium payments if they outlive their policies.
How It Works
Covering an initial term of 15 to 30 years, ROP life insurance comes with premium amounts that do not fluctuate throughout the duration of the policy (known as level premiums). If at any time the purchaser dies, the beneficiaries of the policy receive guaranteed death benefits tax-free. If, however, purchasers outlive the policy term, they recover their premiums upon expiration of the policy. For example, a $1,000,000 policy bought for $1,670 a year over a 30-year period would result in a payout of $50,100 upon the expiration of the policy. The cash that is paid back at the end of the policy is income tax-free, because it is considered a refund.
The biggest benefit of ROP life insurance is the assurance that the money you spend on it is coming back to you. The cost of paying for the insurance is negated by outliving the policy.
ROP insurance can be ideal for people who need life insurance to guarantee security for their dependents, but are not willing or able to spend a lot of money for that security. ROP life insurance is especially favorable for younger workers who can obtain policies with terms well within their life expectancies, knowing they will have a large amount of money coming to them as they near retirement age. Many ROP term life insurance products can convert to some form of permanent coverage without new underwriting. This is a valuable feature for clients if their health deteriorates and they need permanent coverage.
The biggest negative associated with ROP life insurance is opportunity cost. While ROP insurance is less expensive than whole life insurance, it does cost more than basic term life insurance. Depending on the policy, the insurance company may keep a portion of the premium payments even after the policy expires. The company will also keep any interest generated on premium payments. Also, the returned premiums may be diminished in value because of inflation occurring over the life of the policy.
Because of this, any extra money you spend obtaining ROP life insurance could arguably be put to better use in traditional investments, such as the stock market, where returns on investments are pocketed by the investor rather than the investment house or agency. Of course, much depends on market performance during the time period in which you are invested. Additionally, the guarantee of returned premiums only exists as long as the insurance company remains in business. If the company goes out of business, you’re unlikely to get all of your premiums back – perhaps not any of them. And you might not get all of the money you paid into the policy if you lapse on your premium payments, or if you refinance your policy for any reason.
In order to make ROP life insurance work for you, you need to be sure you have the means and discipline necessary to make on-time premium payments for 15 to 30 years, and that it is not the sole contributor to an overall investment or retirement strategy. Otherwise, you could just put money away in a savings account for 30 years.
That said, ROP polices can be a great benefit if you’re a looking to enhance the security of life insurance with a conservative long-term savings plan. If you would like more information on smart life insurance options, call the team at Benefit Logic!
By Ed Gussio