To the relief of many consumers, not really satisfied with either of the two types of traditional life insurance, insurance companies have started offering a third option. Called Return of Premium (ROP) Term, this new product combines features of term insurance and permanent insurance. The feature that gets buyers really excited about ROP Term is that at the end of the policy's term, if you're still alive, you get all your premiums back! That's right. Every cent you paid for the policy will be returned to you.
For many people, deciding between the two types of traditional life insurance has been an agonizing choice: Term or Permanent Cash Value? Term or Permanent Cash Value? The question can go round and round in one's head like the hamster on the proverbial exercise wheel.
The premiums are less for Term, but there's no return on the investment unless you die during the 10 or 20 or 30 years that is the policy's term and your survivors collect the death benefit. With today's long life expectancies, it's likely that you probably won't die before the policy expires. You want to protect your dependents, but you may hate the thought of all those premiums paid and nothing to show for them if you live, which is what you reasonably expect to do.
On the other hand, you can build cash value with the savings component of a Permanent Cash Value policy -- whether whole, universal, or variable. Plus the guaranteed renewable feature is attractive, since you don't know what your health may be years from now. But Permanent Cash Value insurance typically costs two or three times as much in premiums compared to premiums for the same death benefit with Term. Should you spend that much more on life insurance for the cash value and permanent features? Can you afford to spend that much more? It's a hard call for many.
What a relief to have this third choice of ROP Term, an elegant solution that splits the problem up the middle. It's like Term Life Insurance in that the policy is effective, as long as you pay your premiums, for a specified period of time, usually up to 30 years. But it adds a cash value feature with the guarantee from the insurer: If you pay your premiums and you live, we'll give you your money back.
On a typical 20-year Level Term Life Insurance policy the ROP feature could cost from 25 to 50 percent more a year than a standard Term policy of the same period. The additional premium, which the insurer invests, provides the cash for the returned premiums. It's like buying traditional term and investing an extra sum that will grow at a steady pace without risk. It's not "free" insurance, but to the majority of people who -- if they buy the coverage while still relatively young and consequently will most likely still be still living at the end of the policy's term -- it sure feels like it is.
The biggest determinant of the extra charge for a Return of Premium feature is the length of time until you get the premiums back. A 30-year policy is less costly than a shorter one because there is more time for the additional funds to grow. A 35-year-old male in good health might pay $970 annually for a 30-year, $500,000 Return of Premium policy. That's $295, or 44 percent, more than regular term from the same insurer. A 20-year policy might cost $1,175, or more than three times the cost of regular term. A 15-year policy, at $1,645, is almost six times the cost of traditional term.
Is the investment component of the ROP Term policy a good investment? By counting the extra premiums paid as the amount invested and the overall premiums paid back as the investment payoff, these policies pay annual returns of 2.5 to 9 percent--the longer the policy's life and the smaller the extra premium, the better the return. And for many people, there's an additional return in tax savings. If you invested the extra premium yourself, the net gain could be taxable. Putting that amount into an insurance policy makes the total payback a refund of the premiums you paid, and thus not taxable.
You reap the big benefits from ROP Term if you keep the policy for the full term. However, you can surrender the policy during the term and get back a portion of the premium. Premiums are returned on a sliding scale that builds up to 100 percent at the end of the term. So if you take out a 20-year policy and cancel at year 15, you can expect to get back about 50 percent of your money. It's unlikely you'll get any return of premium if you surrender the policy within the first five years. That's because insurers only start making a profit on your policy if you stick around more than five years.
What if you bought a car, made the car payments, and then, when you'd finished paying for the car, you got all your car payments back? Who doesn't think that's a pretty swell idea? The new ROP Term Policy takes features from both Term and Permanent Life Insurance and rolls them into one very attractive alternative - just like getting all your car payments back when you finish paying for the car.
No comments:
Post a Comment