Term insurance, although temporary, provides a guaranteed death benefit to your beneficiary if you die during the policy period. It’s simple and straightforward. The problem is that if you don’t die and your policy expires, all the premiums you’ve paid to the company stays with the company.
Term life insurance usually has the lowest premium in the early years, making it the most affordable life insurance but it does not build cash value.
It covers you for a specified period of time (usually from 1 to 30 years). If you purchase a $1,000,000 term life insurance policy for a 20-year period and you die in any of those 20 years, your beneficiary receives the million dollars. But, if you live and choose not to renew it, or you didn’t convert it to a permanent policy, your money and your coverage are gone!
So then, if you’re not interested in renting your life insurance, consider buying Return of Premium Term Life Insurance (ROP Term Life Insurance).
What is Return of Premium Life Insurance?
A return of premium life insurance policy is a relatively new type of term life insurance policy that provides a death benefit and a return of premium feature. Return of premium life insurance is aimed right at one of the greatest objections to term life: “I am probably not going to die, and my money will have been wasted.”
The return of premium option is a rider that provides for the insurance company to refund all premiums paid to the company if the insured outlives the term of the policy. Since it’s a rider, there is an additional charge for adding it to your policy. The amount of the additional premium is generally based on several factors including the term length of the policy, the annual premium, and the age of the insured.
Here’s how it works: If you keep your policy for the term period, at the end of that time whether 15, 20 or 30 years, the life insurance company that issued the insurance with the return of premium policy, returns the entire premium that you paid for the insurance. Since this refund is returned premium, the insured will receive it tax-free, and in a lump-sum.
There also is some partial return of premium for policies canceled before the end of the term (depending on the year it’s canceled – the longer it’s kept, the higher the amount of the return).
Unlike regular term policies, a return of premium life insurance policy is designed to provide a guaranteed return of your total cumulative premium paid on the policy during the level term period, not including substandard (extra charges for health) and rider charges (extra benefits such as disability coverage), if any, which will be paid to the policy owner at the end of the level term period if the policy is then in force.
Who should Buy Return of Premium Term Life Insurance?
Return of premium life insurance is not for everybody. Most investment professionals will likely try and dissuade a client from buying return of premium life insurance because you would do better financially investing the additional premium elsewhere.
However, there is a large group of educated adults out there who are simply not good at saving money for retirement. There is also a large group of educated adults who do not have an appetite for the risk when investing in stocks or bonds.
Moreover, not everyone works for an employer that offers retirement benefits like a 401(k) or another type of pension plan. There are as many people living paycheck to paycheck as there are who comfortably make more than they spend, and these are the people who should consider a return of premium term life insurance policy. Here are the reasons why:
- Purchasing return of premium life insurance forces the policyholder to save for his or her future
- The return of premium benefit is paid in a lump-sum payment that is tax-free
- The policyholder needed to have life insurance in the first place
How to Fund Your Retirement Plan with Return of Premium Life Insurance
If you are one of the adults we mentioned above and find it difficult to save for retirement even though you know it’s smart to do so, consider this example:
Roger is a 30-year-old married father of three who knows he needs at least $500,000 of life insurance coverage so his spouse and family won’t suffer financial stress if he dies unexpectedly.
Additionally, Roger is self-employed and hasn’t begun investing for his retirement and is unwilling to invest in the stock market. After discussing his situation with his insurance agent, Roger decides to add the return of premium rider to his 30-year term life insurance policy on the advice of his insurance agent. By doing so, Roger takes care of two issues that have been bothering him for quite a while:
- He has peace of mind knowing his loved ones will be okay financially if he were to die during the next 30 years
- If he is still alive when he turns 60, Roger will have a large chunk of money that he can use to purchase an annuity for his retirement
Here’s how Roger can invest in his retirement using a return of premium rider on his 30-year term life insurance policy:
The monthly premium for a 30-year $500,000 term life insurance policy with a return of premium rider = $42 or $504 per year
Total Cost of Roger’s life insurance over 30-years = $15,120
If Roger outlives his policy, his insurance company would pay a tax-free payment to Roger of $15,120
Roger then takes that $15,000 and purchases an annuity that will earn interest over the next 10 years until Roger begins to make withdrawals at age 70 when he retires.
Remember, the life insurance return of premium is considered income tax-free because you aren’t receiving back more than you paid into the return of premium life insurance policy. And, if Roger happens to die during the 30-year term period, his surviving loved ones would have $500,000 to help them deal with the financial expenses of everyday life.
In my 20+ years as an independent life and disability insurance broker, I have personally assisted thousands of clients with their life and disability insurance needs. Being independent, I represent many highly-rated insurance companies and, because I am not beholden to any one insurance company, my focus is to find the right company and policy for each individual client.
I believe that when people shop for insurance (or anything else, for that matter) on the Internet, they are looking for a simple, non-intrusive, non-pressure method of doing so. I strive to treat my prospective clients with the utmost respect and I believe an educated prospect can make the right decision without sales pressure.