Return of Premium Term Life Insurance
A return of premium term life insurance policy is an insurance contract in which the policyholder(s) will receive the aggregate value of all premiums paid at the end of the contract’s term, provided the insured does not die and the policy remains in force. Return of premium life insurance combines two features not ordinarily found in the same policy: temporary insurance and a cash investment return on the policy premiums paid.
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Details of Return of Premium Life Insurance
As an example, consider a 30-year level term insurance policy with premiums of $100 per month, or $1200 per year. ROP life insurance would present the policyowner with $36,000 at the end of 30 years if the insured remains alive and the policy is kept in force. A standard, level-term insurance policy would collect premiums but pay out only if the event of the insured’s death. If the insured lives, nothing is paid out. Thus, ROP life is sometimes advertised as a “win-win” product that pays out regardless of the mortality outcome.
Although the return-of-premium feature is usually found in a policy specifically designed for that purpose, it can sometimes be added to a standard policy as a rider. The premium returned does not normally include extra premiums paid for riders to the policy.
The Benefits and Drawbacks of Return of Premium Life Insurance
The premium rates per-dollar of death-benefit for return of premium term life are lower than for permanent insurance. The real choice for potential buyers is between return of premium insurance and other term variants such as level-premium term. For a given term and death benefit, premiums for level-term insurance are at least 25-50% lower. The greater the term, the greater is the premium advantage enjoyed by standard term insurance. Thus, the premiums of return of premium term insurance are at once its advantage and its disadvantage.
The extra premium paid by policyowners of ROP life is best viewed as an investment that will yield a return upon the maturity of the policy. In our previous example, assume that a level-term premium policy would cost $70 per month, or $840 per year. (This is a comparatively-small premium advantage for the standard term policy.) The policyowner is paying $30 extra per month, or $360 per year, in order to eventually receive $36,000 in 30 years. This is a rate of return of almost 7%. The historical return on a portfolio of diversified stocks over 30 years is around 10%. Thus, the policyowner could amass more wealth – around $69,000 – by investing this premium differential somewhere else, rather than in a ROP term life insurance policy. A shorter term would make the comparison a closer one, which is probably why ROP policies with a term of less than 15 years are harder to come by.
The optimum strategy for a determined purchaser of return of premium term life insurance is to aggressively seek out the least-expensive premium rates and to select the shortest feasible term. Currently, premiums vary widely among companies, so there is wide scope for careful shopping.
While the typical ROP policy does not pay a benefit for the early surrender of the policy, some policies that offer a partial return of premium for early surrender can be purchased. These policies will require that the policy be held for a few years in order to receive the partial benefit upon surrender.
Suitable Candidates for Return of Premium Term Life Insurance
Because return of premium is term insurance, anyone with a temporary insurance need might be considered a candidate for it. As a practical matter, however, two groups of people form the bulk of suitable buyers. First, there are those people who are utterly confident of outliving the term of the policy. This condition is mandated by the fact that premiums for return of premium term insurance are significantly higher than those for regular term policies such as level-premium term insurance. If the insured were to die, the choice of ROP would leave his estate with less wealth than otherwise. In fact, the death rate for term insurance policyowners is quite low, so survivability is a reasonable presumption. The premium differential still limits the potential buyers to those people who believe that one must collect money from an insurance policy to benefit from it – those people who find ROP insurance a “win-win” proposition because they (or their beneficiary) are sure to collect if they keep the policy in force.
Regulatory News
In April, 2009, the National Association of Insurance Commissioners passed new rules requiring insurance companies to increase their reserve holdings for return of premium life insurance policies. As a result of this requirement, some insurance companies chose to drop these products while others raised premium rates on them.
Summary
Return of premium life insurance is an attractive way of satisfying any temporary insurance need when compared with the range of permanent insurance products, such as whole life and universal insurance. When compared with standard term insurance such as level-term policies, the likelihood of a superior investment alternative should be considered.
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