TERM
LIFE INSURANCE THAT MAY PAY BACK YOUR PREMIUMS
Would
you like to buy term life insurance that has the potential to pay
back the premiums you paid over the life of the policy?
Many people would love that deal.
Perhaps they can't afford permanent life insurance with its investment
component. Or perhaps
they hate "wasting" their premium dollars on term insurance
which they'll likely never collect any death benefits due to not
keeping the policy late in life because premium becomes so expensive.
In recent years, insurance companies
have promoted a concept called return-of-premium term life insurance,
which pays back, in a lump sum, all the premium dollars insureds
pay into their policy as long as they keep the policy for its full
term. It may sound like a good deal, but some financial planners
and insurance experts express caution.
To give you an example, say you
need a $500,000 term policy for the next 30 years. Barring other
factors, a regular term policy with an insurer rated A+ (Ratings
are not a reflection of the underlying investments, but of the insurance
company's ability to pay) would cost a nonsmoking male, qualifying
for preferred plus, around $410 annually, according to quotes provided
by the online insurance broker AccuQuote. If you lived to the end
of the term, you probably would have shelled out $12,300 in premiums,
and the policy's death benefits might not have been paid out.
A comparable return-of-premium
term policy would cost $605 a year, according to AccuQuote. If you
keep the policy in force the full 30 years, you'd get back all $18,150
"tax free" that you paid in premiums. Or looked at in
another way, for the $5,850 you paid in extra premiums, you'd get
back the $12,300 in premiums you wouldn't have gotten back at all
if you'd bought the regular term.
For some needing insurance, this
has the potential of being a good deal. But there are some catches.
The first, of course, is whether you can realistically afford the
higher premiums. For our example, we have shown the annual premiums
for the return-of-premium policy to be 47 percent higher than the
premiums for the standard term policy.
That difference jumps dramatically
the shorter the term. A $500,000 standard term policy for 15 years
would cost $210 a year, but $1,035 for an ROP policy, according
to AccuQuote. That's five times the cost! (ROP premiums are higher,
the shorter the term, because the company has fewer years to earn
the money necessary to pay back the premiums plus cover costs and
profit.)
The differences are larger the
older you are when you take out the policy.
According to my calculations, a 40-year-old who wants 15
years of $500,000 coverage would pay $285 for a standard term policy,
but six times that ($1,715) for ROP coverage.
Yet most financial planners recommend
that the first priority for life insurance is to have sufficient
coverage. If you can't realistically afford ROP coverage for the
amount you need, but you can for regular term, you probably should
go with the regular term. Keep in mind that higher ROP premiums
could derail contributions to retirement plans or may exclude other
insurance needs such as disability coverage. Evaluate your financial needs and confer
with your financial planner before taking any action.
Assuming you can afford ROP,
there is the question of whether you'll actually keep the policy
for the full term. A few companies do refund a portion of your premiums
if you drop the policy before the term is up, but it's not a large
portion. And if you surrender the policy in its early years, you
might receive no refund at all and even pay surrender charges.
Historically, holders of term
insurance keep their policies for an average of only eight or nine
years before they either drop coverage or switch policies. Thus
over a period of 20 or 30 years, an average investor may experience
some difficult financial times and be forced to drop the steeper-priced
ROP policy.
Some critics of these policies
argue that people would be better off buying a cheaper standard
term policy and investing the difference that would have gone to
ROP premiums, particularly if they can invest in a tax-deferred
retirement account.
Proponents counter that many
people are not disciplined enough to consistently and wisely invest
the difference.
Regardless, before plunging into
a return-of-premium policy, talk with your financial planner to
see what is really the best option for you.
The
information contained in this article should not be construed as
financial, tax or legal advise.
As with any financial or legal matter, consult your qualified
securities, tax or legal advisor before taking action.
This article
was produced by the Consumer Affairs Dept. of The Financial Planning
Association and provided to you courtesy of Terry P. Welsh, CFP,
Ketchikan, Alaska. If you have any questions or concerns regarding
this, or any other financial topic, please call me at 1-907-225-0619,
or click on the "CONTACT US" button to arrange for a free initial
consultation.
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