What Return of Premium Insurance Holds for You
Despite huge criticisms, return of premium life insurance policy can be a choice for you. Its immediate suitability lies in the fact that it does not make off with your hard-earned money. You see, the name of the policy itself speaks of this aspect—return of premium.
The insurance company returns all your premiums to you at the end of the policy. However, you need to know more beyond this aspect of the refund of premium life insurance policy, aka ROP, its acronym. If you are looking for term life insurance with cash value, you are looking for ROP.
Definition of Return of Premium Life Insurance
A definition of return of premium life insurance would read like this: it is a temporary life insurance policy that offers you guaranteed benefit upon your death and if you outlive the policy life, you get all your money back.
How Return of Premium Life Insurance Works
Basically return of premium life insurance works the same way any traditional term life insurance policy does. It provides you protection for certain periods – 20, 30 or 35 years with the guarantee of death benefit. But unlike the traditional term, the return of premium gives back to you all the premiums you pay off if you survive. If you die, the people you nominate receive the full death benefit.
The First Catch
The first catch of return of premium life insurance policy is certainly the death benefit. Say your policy ends on 30th June, 2045 and you die anytime before 1st July, 2045 (that is within 30th June, 2045), your heirs will receive the promised death benefit for a certainty. If your death benefit is $500,000, your heirs will receive the same amount – $500,000.
The Second Catch
The second catch of ROP is the return of the sum total of premiums to you if you live beyond the tenure, 30th June, 2045. If you make a total payment of $20,345 over a span of 30 years, you will receive the same amount of money- $20,345.
Difference with Whole Life Insurance
Life insurance gives you nothing back unless you buy a policy with an investment portfolio – the whole life insurance. Buying it is often beyond the capacity of the majority since it is far from being inexpensive. You need to put several hundred dollars every month into it to get the cash benefit. The investment portfolio keeps sending in money in little amounts to build the cash value which is the ad-catch of the policy.
For its second catch, the death benefit, you need to pay premiums prior to your death. However, beyond this rule of thumb, whole life insurance policy works in variant portfolios. Depending on which portfolio you choose, you may have to accept loss or leave a cut-off death benefit for your heirs.
You might make a mistake by taking return of premium life insurance for whole life insurance. The fact is cash value term life insurance or premium return term insurance works in a different way. It provides temporary protection while whole life insurance remains valid till the policyholder dies.
Difference with Traditional Term Insurance
Return of premium life insurance falls in the term life insurance category; but works atypically. A term life insurance policy bears only one catch – the death benefit. Your heirs receive it in the form of a contracted amount of money in the event of you passing away within the protection years. Your death beyond the term years will translate into total non-payment to your folks. Premium back term life insurance policy is an aberration to this core concept of term life insurance functionality.
The Pros of Return of Premium Life Insurance
The Death Benefit
Obviously, the death benefit is the biggest bait of the policy. We primarily purchase life insurance policy for protection of our dependents from worries over the thought of how they would live after us. Sudden death before we could fix things up for them could prove fatal to them. Life insurance provides to us the promise of protection we want to ensure for them. Return of premium term life insurance essentially being a term life insurance policy gives us the assurance. Its death benefit is guaranteed.
The Living Benefit
The return of premium, the unique feature of the policy, is not an ignorable advantage of the policy. Term life policies are traditionally wasters. The benefit comes to your heirs only and only if you die within the term period. Your insurer has all your money when you outlive the term period. But a return of premium policy gives you all your money back which has the following benefits for you:
The returned amount of premium money which you get at the end of your policy tenure is not insignificant. You can use the money whatever way you want to. These are the most useful ways you can make use of the refund:
Pay personal borrowings from colleagues or office.
Adjust borrowings from banks, credit unions, mortgages, home or car loans.
Buy home appliances like TV, computer, refrigerator etc.
Invest the money to somewhere you may like to.
Spares You of the need for funeral cost insurance.
Another big advantage of term life insurance with refund option is that you don’t have to buy another policy for your last rites. Generally a funeral advantage insurance policy is expensive and many people get much less than what they pay to the insurer. As the sum total of premiums you pay is not very scanty, you can put away some hard cash for the purpose. Thus you are able to save a lot on the burial insurance. You remain free of the anxieties of getting one as well.
Purchasing a return of premium policy has another advantage that no other term life insurance policy offers you. This policy lets you borrow from the premiums you pay to the insurer. Although this is by default a whole insurance feature, integrating it into the refund of premium term life insurance policy makes it user-friendly.
Every term life policy bears a level period. That is to say, your premium costs will not rise until you are of certain age, usually 65. You do not have fears that you will be out insurance protection when your policy goes off. When you are past your level period age, you can extend it annually with a rise in premium. But the rise does not go beyond a certain amount which your policy documents will state.
Brings Mental Peace
When you are on the return of premium term life insurance policy, you have mental peace in two ways. You remain sure that your folks are safe. Also you know that your money will not be stolen. A traditional term policy leaves its buyers with disappointment in this regard.
You Can Save for Future
A return of premium term life insurance policy can be a good home savings for you. Instead of keeping your money in your piggy-bank, you just send it to your insurer. This works like a home-saving option.
The money you get back from the insurer is not taxable.
You Can Customize It
You can customize your policy with rider for children’s term rider, waiver of premium rider or accidental rider. However, it depends on the insurance company.
Cons of Return of Premium Life Insurance
You Get No Profit
A return of term life insurance policy is twice to three times more expensive than the traditional term life policy. It may even be nearly as costly as the whole life insurance policy when your level premium period is over. But while whole life policy offers you cash benefit from the investment which your insurer makes out of your money and gives you a share of, ROP robs your profit off.
Borrowing Isn’t Without Interest
Although it is a good aspect of the premium refund insurance policy that you can borrow money from the paid premiums, you need to pay interest to the insurer to avail this pro. It is a con which you probably cannot easily compromise with.
Rise in Price
Once your level term period is over, you have to pay higher price to stay under insurance protection. And this will keep rising every year until the price reaches the apex limit.
Return of Premium Life Insurance Cost
Term life insurance is pretty cheap. But when it is the return of premium term life insurance policy, the rate goes much higher. The cost is usually high for the price of a traditional term, depending on your factors like health, habits, family history, coverage amount, legal status and so on. Usually the cost does not go as much up as the whole life policy. Here is a comparison of ROP vs. Traditional term rate from two companies.
Quote Seeker: Finn Ross
Date of Birth: 08/31/1987
Term Period: 20 Years
Coverage Amount: $500,000
Quotes Provider: quicklifecenter.com
Company Name ROP Monthly Cost Traditional Monthly Cost
Assurity $66.56 $25.67
AIG $91.21 $26.73
Who Is Return of Premium Life Insurance for
According to LIMRA, only 2% of life insurance buyers go for the return of premium life insurance policy. It clearly indicates that the popularity of ROP is marginal. Despite little popularity, it might be a considerable option for you if:
You Are Not for Whole Life
Premium back life insurance is for you if you are not willing to buy whole life insurance and pay premiums till death. You very well know you do not need life insurance throughout your life. You require it till you have not been able to manage things well enough. But you are not ready to waste your money on insurance. You can go for ROP policy then. That is to say, when you want financial protection for a term period but you do not want the money you pay to go into trash can, return of premium life insurance is for you.
It can be for you depending your financial capability as well. If you belong to a lower middle income group and cannot afford to buy a more expensive whole policy, you may think positive about the return of premium insurance policy.
You Have the Mindset
Return of premium insurance also requires a mindset. It is no good bait for you if you are for profit from your insurance. If you are interested only in the insurance protection this portfolio can be a suitable choice for you.
You Want Insurance
Many people would rather go for insurance than investment. But if you know the difference between investment and insurance and want protection for your beloved ones, return of premium life insurance can be a worthy choice for you.
What Life Insurance Mentors Say
Return of premium life insurance policy has now emerged as a new brand of term life insurance. Still, this policy works as a rider with many carriers. We have already mentioned that ROP has not gained much popularity. Many would naturally prefer whole life to return of premium insurance as it offers profit advantage. But it is good to remember it is not as costly as that of whole life insurance. So comparing the premium return life insurance with whole life sounds less realistic.
Many financial experts say that investing elsewhere than putting money in return of premium life insurance is a wiser approach. They give you calculations as to how much more you could get by doing so. We agree only to disagree with them. While their calculations may be right, they forget the essential issue that no investment provides you the assurance of protection which insurance does.
Insurance is, by all means, insurance. Insurance is what it insurance does. No investment can replace it.
Return of premium life insurance does not make you a loser, we think.