Have you heard of Return of Premium Term Life Coverage?
Most individuals understand Term Life and Whole Life insurance products. I want to discuss a new product that is a hybrid of the two; Return of Premium Term – a life product where “You can have your cake and eat it too”.
Question: Have you ever received all your premiums back from your auto insurance or home owners insurance for being a safe driver or not making a property claim? No, it is not going to happen. However, with return of premium term, it is just that; you don’t have to die to get your money back. Additionally, the cost for Return of Premium Term is right in the middle considering the low cost of term insurance and high cost whole life coverage. Here is a demonstration.
All life insurance contracts are generally underwritten and final rates are determined by the product type, sex, age, and overall health status of the applicant. In order to show the cost differences between the various life insurance products lines and for illustrative purposes, I will quote a constant demographic, myself. I am 45 years old, a preferred non-tobacco user, 6’-1”, 195 lbs., and in relatively in good health. I’m currently on one maintenance medication.
- My rate 20 year term, $250,000 term life policy is a $60 per month and in 20 years the total premium paid into the policy total is $14,000.
- My rate for a $250,000 whole life policy is $327 per month for the rest of my life, and in 20 years the total premium paid into the policy total is $78,480
- My rate for a $250,000 for a return of premium term is $170 per month (right in the middle) and in 20 years I’ll receive all $41,000 paid in premiums back.
As you know, conventional, Term Life is the most common type of life insurance. Term life has its Pros: This financial contract is low in cost; easy to purchase, provides adequate coverage for dependent family members, and is a foothold to permanent coverage. The Cons: This product is not designed to be permanent, and lacks the development of cash value. Once the term period ends, the policy will either terminate or the premium will renew each year thereafter. My $60 term premium is considerably low for the next 20 years, but upon renewal, on the 21st year, my premium jumps to a whopping $1520 per month and will continue to increase/renew each year thereafter.
Return of Premium Term: a cash value term product hybrid.
The Pros: Return of premium term is reasonably affordable, easy to shop, develops cash value accumulation, convertible to permanent coverage, and is a dollar for dollar match return of the premiums paid into the policy.
Again, my rate for a 20 year $250,000 return of premium term policy is $170 per month. Over the next 20 years I will have paid in a total accumulative premium of $41,000, contrast that with the total premium of a conventional 20 year term policy of only $14,000. However, at the end of the 20 years under the return of premium I will receive back, dollar for dollar, all the premiums paid into the policy. I can receive the cash value back either in a lump sum cash surrender, a reduced paid-up whole life policy, or a paid-up annuity, guaranteeing future income for life.
The Cons: low percentage of return on investment, and early surrender fees.
As you can see, the difference in premium of a conventional term and a return of premium term policies are substantial. If I took this difference in premium and simply invested it through conventional means I would have a much greater potential for gains compared to the low guaranteed gains provided through the return of premium policy. Additionally, if I surrendered the return of premium policy early in the life of the term, I would likely receive substantially less cash value than what I paid in premiums. There is an annual schedule of surrender fees that decrease as the length of the term policy endows.
The return of premium policy is a good solution for those who do not find value in a temporary life term policy or simply can’t afford the high monthly premium of a permanent whole life contact. So which product is best for you and your family? Hopefully this discussion tapped your curiosity. Each has its pros and cons… Please consult us here at Thomas & Associates for a complete review of the life insurance options out in the Marketplace.