Return of Premium Term Life Insurance (ROP)

A growing number of life insurance buyers and many well known insurers are looking favorably at extra-cost return-of-premium term life insurance policies as an alternative to traditional term insurance--the low-cost simple death benefit insurance that many advisers recommend as a way to buy the greatest amount of protection for the smallest amount of money. Normal term coverage offers no investment component or increasing cash value--just the 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.

The pure protection of term life doesn't have the seductive appeal to buyers of a guaranteed payoff, live or die. People do not like to spend money on something they don't think they're going to use. However, the primary reason traditional term is often so cheap is that with today's long life expectancy and a limited length of coverage--the chance of collecting a benefit is small -- some estimate that only 5% of all term life insurance policies ultimately pay a death benefit.

How Do Return of Premium Term Insurance Policies Work?

Return of premium policies work 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. The insurance isn't really free, but to many it 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 has less excess cost 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.

Life insurers report particular interest for the policies among younger buyers. Single parents find the coverage appealing. They are very concerned about leaving a dependent without support but young enough that they really do not think their beneficiary will ever collect anything.

Do Return of Premium Term Life Insurance policies make financial sense ?

Return of Premium policies aren't sold as investments, however, the return from sticking with one may not be all that bad - and, in fact, may be exceptional by current standards. By counting the extra premiums paid (those amounts in excess of the cost of a basic no-refund term life insurance policy) as the amount invested and the overall premiums paid back as the investment payoff, annual tax free returns of roughly 5 to 9 percent resulted on a sampling of policies--the longer the policy's life and therefore the smaller the extra premium, the better the return (You'll need a financial calculator to estimate this yourself.) If you invest this way on your own, the net gain may be taxable; wrapping this up in an insurance policy makes the total payback a refund of the premiums you paid, and thus not taxable.

When considering a return of premium policy, compare the extra cost of any insurer's Return of Premium policy not just to its own traditional term but also to regular term policies offered by competitors. If you can buy the amount of insurance you need and afford the extra cost to make it a return of premium policy it makes a lot of sense to guarantee your future financial success with return of premium term life insurance.