Return Of Premium Life Insurance
By James Tobin, CFP®
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Expert Review Of Return Of Premium Life Insurance
Jim Tobin, CFP®
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Have you ever heard of return of premium life insurance ?
The pitch, in its simplest form is "pay more for your insurance and get all of the money you paid back if you don't die before the policy expires".
On the surface it seems to good to be true.
In this article we will discuss the pros and cons of return of premium policies and everything you need to know to get the best deal possible. If you already know what information you are looking for, you can use the quick navigation tool to skip around.
What Is Return Of Premium Life Insurance ?
Return of premium life insurance is essentially term insurance-that is, it is in effect until the end of the term usually 10,15,20 or 30 years- that returns the premiums paid to the insured at the end of the term.
While still available, these policies are far less popular than previously. The promise of returned premiums having been outweighed by hopes of better returns on the difference in price between traditional term insurance and return of premium or R.O.P.
This is not really surprising as the "buy term and Invest the difference" theme has severely impacted permanent insurance sales over the last 30 years.
With similar cost profiles it would be hard to justify R.O.P. over a participating whole life or indexed UL plan, but alas, that's a different article for me to write.
What Are The Positives Of Return Of Premium Life Insurance?
The positives are pretty straight forward. Return of Premium life insurance is a forced savings vehicle.
Return of premium life insurance allows you to both protect your loved ones in the case you pass while the policy is in force,and recoup the cost if you don't.
This recouping can be used for retirement, college costs...etc
...and because the government views the "return" as the repayment of over payments, it comes tax free.
People who either lack the discipline necessary to save or simply don't trust the traditional savings vehicles available to them (stock market), have been willing buyers of R.O.P.
What Are The Negatives Of Return Of Premium Life Insurance?
The primary "negative" of return of premium life insurance is cost.
"Cost" has two meanings in the critique of R.O.P., the obvious one is the premium paid. That is, dollars and cents.
The less obvious cost is " opportunity cost". What you could have done with the difference in money you pay for R.O.P. and term life insurance.
The logic behind "buy term and invest the difference" has been very effective in pointing out the opportunity cost of R.O.P. (as well as permanent products).
Unfortunately, the follow through has not been great with investing the difference. that is rather than saving or investing the difference, it turned into pizza and movies.
In addition to the two costs just discussed, the major problem with R.O.P. is the lack of flexibility. With the worst of the R.O.P. plans, a failure to pay the premium will result in the loss of accrued savings.
The better policies will have automatic policy loan provisions (APL) which will pay the premium out if cash value, much like permanent policies.
How Much Does R.O.P. Life Insurance Cost?
Return of premium life insurance casts significantly more upfront than traditional term insurance. The table below shows the cost of term and R.O.P. for 20 & 30 years for a healthy 40/yr. old male nonsmoker for $250000 . It also shows total payments over the life of the policies and the differences.
You can see why you may come to the conclusion that you'd be better investing the difference yourself.
Why You Should Use An Independent Agent When Shopping For Return Of Premium Life Insurance
Now you may already understand that your personal history matters, and that two people in very similar situations can get very different offers from the same carrier.
What you might not know is that different insurance companies will also treat each case differently.
For example Prudential Financial may have more of an appetite for the risk that RA presents than say AIG. In this case the underwriting grade will reflect this increased appetite.
So, if your Agent only represented one carrier and you found out later that that you could have gotten a rate 35% or 45% better, how would you feel?
You'd probably be angry either at the agent or likely both. So it's important that your Agent represent multiple carriers.
This is particularly true in the case of ROP as not that many carriers still offer it.
Note that if he doesn't have access to alternatives , he may not be interested in telling you.
Case Study Pricing Policies With ROP
Please see the case study below . it will show why it is in your interest to have as many options as possible available when shopping for life insurance with Return of Premium or any impairment.
Male Age: 43
$250000 20 Year ROP Term
Fairly well controlled High Blood Pressure
Beta Blocker use - No Other Health Concerns
This looks like a standard/preferred case that might get a better rating with one or two carriers. depending on the insurers appetite for a cholesterol risk.. Let's take a look at the rates.
This table which shows the few major life insurance companies with ROP available, illustrates the difference in rates. For standard rates MoO much more expensive than Assurity.
On its face this seems like a pretty straight forward choice and if underwriting grades between carriers is the same, it really can be that simple.
This kind of easy price shopping is particularly useful for younger folks in good health and demonstrates why you want to use an independent Agent.
For people who suffer from High Blood Pressure or seek an ROP policy , it can get much more complicated.
Because life insurers manage their appetite for specific risks by being more lenient or more stringent with underwriting grades, you need to know which company will grade you a preferred plus risk and which ones will grade you as standard.
In the case above the blood pressure underwriting requirements are conflated with the limited number of ROP carriers. The likely winner here is AIG at Preferred plus because the better price from Assurity wont be offered due to his blood pressure.
It is also notable that Mutual of Omaha only offers a standard rating for ROP contracts. A cautionary glimpse into the dangers of working with captive agents.
These are things you can't know by simply looking at the lowest price. In this hypothetical using an independent agent could save you 8.7% (the difference between AIG @ Preferred plus and Assurity @ Preferred.
Your Next Step
Now that you know the information you will need to receive the most accurate quote possible, it's time to gather the information and speak to an independent Agent (raising my hand).
Simply give us a call or shoot an email over and we can get you started.
We are committed to totally transparent pricing (we'll even share our computer screen with you if you'd like), and making the application process as painless as possible.
If you have any questions, We'd like to hear them.