I am often asked my opinion of Return of Premium life insurance — ROP for short. Like most products on the market, ROP can make sense for some and not for others. When ROP products were first offered several years ago, I heard Clark Howard offer his opinion on the product and I was a little suprised by what he had to say. He said that it was a good move for those people who are very diligent about paying their premiums on time and plan to keep the policy for the full term period. If times got tough, and the policy had to be dropped, then the benefit of the ROP product would be lost. Clearly, one must be confident that they will have the financial stability to keep the insurance in force.
Recently, I received the following information promoting Return of Premium term insurance:
Male Age 50 standard no tobacco $500,000 face amount for 30 Years.
Annual Premium for a typical level term policy with no money back: $3,505
Annual Premium for a representative ROP Term Policy with 100% money back: $5,965
Annual Premium difference: $2,460
ROP Term Cash Surrender Value at the End of 30 years: $178,950
Net Cost for Protection for 30 Years: ZERO
Taxable Rate of Return needed to grow the annual premium difference into $178,950 assuming a 28% Tax Bracket : 7.3%
The above promotion is very compelling. It’s not easy to find a 7.3% guaranteed rate of return.
Now, here are some “cons” regarding Return of Premium term insurance. If the policy is dropped anytime before the end of the term period (most commonly 30 years), then the benefit of ROP is mostly lost. With some carriers, there is a partial return of premium based on a time schedule. However, the company pays little to nothing unless the policy is kept in force for at least 15 to 20 years.
There are several carriers offering this product as a part of a Mortgage Protection plan. For the most part, those plans are over-priced. See my post on Mortgage Protection Life Insurance. It is important to work with a company that has very strong financial ratings. It is also important to compare the cost of the ROP product to the cost of the best low-cost term life insurance available. We run comparisons to see if an ROP product makes sense.
Again, even if the numbers are compelling, there are other factors to consider. The advice given by Clark Howard is sound — the total premium should be such that it wouldn’t be difficult to pay even in tough financial times.
Not all ROP insurance is the same. Having a thorough understanding of how the product works is essential.
Greg Sanders 678-236-1600 www.insuranceadv.com