Return of Premium

Do you think that return of premium life insurance is too good to be true? Well, once you take a closer look at the details you may feel this way. On the surface, return of premium life insurance offers a death benefit should you pass away while you have coverage. But if you don't the company you purchased your policy from will return the premium to you. Talk about coverage that is better than your basic term policy! The biggest advantage of return of premium life insurance is the guarantee that your insurer will pay back your premiums if you don't die during the term of your policy. As long as you continue to pay your premium on time you will be on track to receive your money back when your policy runs out. But how much does it cost? When compared to regular term life insurance you are going to pay more for a return of premium life insurance policy. While it is impossible to say exactly how much more it will cost, a rough estimate is approximately 25 to 30 percent. Why would a company want to offer return of premium life insurance? One reason is that this is a great way for them to do business with you. By locking consumers into a term policy, even if it offers a return of premium life insurance, it guarantees that they will be a customer for a long time. Before you purchase a basic term policy, be sure to consider the benefits of return of premium life insurance.


Imagine getting a money-back guarantee on your Term Life Insurance: Your family receives a lump sum of money if you die, but if you live the company returns all of your premiums!

Believe it or not, such a product now exists and is just one of the innovative solutions coming your way from some of the best insurers in the business. It's called Return of Premium (ROP) and its aimed right at one of the greatest consumer objections to pure life insurance: "I'm probably not going to die, and my money will have been wasted."

Before this innovation, life insurance was available in two forms: Term Insurance and Cash Value Insurance.

Term Insurance is cheap and easy to understand (which explains its proliferation on the Internet today). With Level Term Insurance, you know exactly what the premiums will be for a fixed number of years. It's very affordable life insurance protection, but you get nothing if you outlive the policy.

Cash Value Insurance, on the other hand, includes pure insurance coverage - guaranteed renewable for your whole life - along with an investment component to build cash value. Building cash value, however, means paying higher premiums. While an unused term policy can feel like a waste, a cash value policy can often cost two or three times as much for the same coverage.

Return of Premium (ROP) Term is an elegant and effective new solution that splits the problem up the middle. It starts out like Term Life Insurance with one extra promise 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 about 30% more, but that extra premium will effectively earn you a 6-7% return over the 20 years -- just enough to earn you back everything you've paid in. What's in it for the carrier?

LOYALTY. Carriers spend a lot of money to get your policy, and only start making a profit if you stick around more than five years or so. ROP guarantees that lots of customers stay for the full 20. And, for those that don't, the carrier made an extra 30% on those guys -- and used some of it to pay you a solid return on your money. So if you know that you are going to be insured for the long haul, then think about tossing in a few extra dollars and getting it all back in the end.

David Sharpe of Los Angeles is forking out $11,240 a year in premiums for term life insurance, but he isn't sweating the payments. He's counting on getting all of them back after the policy expires in 30 years, assuming he's still alive--a total of $337,200 tax free. At 34, the personal agent and manager says, "It is my intention to live well beyond the 30 years that my insurance covers."

That sentiment may explain why a growing number of life insurance buyers at Mutual of Omaha, AIG American General, Federal Kemper, and other insurers are looking favorably at extra-cost return-of-premium policies as an alternative to traditional term--the low-cost unvarnished insurance that many advisers recommend as a way to buy the greatest amount of protection for the smallest amount of money. Term coverage offers no investment component or increasing cash value--just a promise that if you die while the policy is in force your beneficiaries collect. Stay healthy? It's like not collecting on your homeowner's insurance because your house didn't burn down.

But the pure protection of term life doesn't have the sizzle that insurance agents crave, nor the seductive appeal to buyers of a guaranteed payoff, live or die. "People do not like to spend money on something they really don't think they're going to use," says Doug Israel, senior vice president of product development at American General. One reason traditional term is often so cheap is that insurers agree that for many buyers--with long life expectancy and limited length of coverage--the chance of collecting a benefit is small, says Byron Udell, chief executive of AccuQuote, an online insurance broker.

Bonus bucks. Return of premium plays off that low risk but increases the cost. A common return-of-premium policy might cost about 25 percent to 50 percent more a year than regular term. It's the extra amount, which the insurer then invests, that 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 many it feels like it is. "You have nothing to lose; you get all that money you paid in back," says Kimberly Frenette, 38, of Plainfield, Conn., who bought a $100,000 policy along with one for her husband.

Insurance purists are skeptical. "It's a sales gimmick," says Joseph Belth, professor emeritus of insurance at Indiana University and editor of The Insurance Forum. He says the payback feature caters to people prone to pointless second-guessing. "You buy insurance for financial protection; you can't look back and say, 'I made a mistake because I didn't die.' " And if your budget is limited, it's better to buy as much regular term as you need. "Don't get confused by these add-ons," advises J. Robert Hunter, director of insurance for the Consumer Federation of America.

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, according to AccuQuote. 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.

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