Term Life Insurance That May Pay Back Your Premiums
Would you like to buy term
life insurance that pays 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 they hate “wasting” their premium
dollars on term insurance for which they’ll
likely never collect any death benefits because
most don’t keep it late in life because
it 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 sounds like a good deal,
but some financial planners and insurance experts
Say you need a $500,000 term
policy for the next 30 years. A regular term
policy with an insurer rated A+ 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 would
have shelled out $12,300 in premiums, and the
policy’s death benefits would 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—the 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 can be a good deal. But there are some
catches. The first, of course, is whether you
can realistically afford the higher premiums.
For our example, the annual
premiums for the return-of-premium
policy are 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
The differences are larger
the older you are when you take out the policy.
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
Yet most financial planners
strongly 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. You also don’t want
the higher ROP premiums derailing contributions
to retirement plans or excluding other insurance
needs such as disability coverage.
Even assuming you can afford
ROP, there is the question of whether you’ll
actually keep the policy for the full term.
A few companies will 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. Yet over 20
or 30 years, you might go through some difficult
financial times and be forced to drop the steeper-priced
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
Proponents counter that many
people are not disciplined enough to consistently
and wisely invest the difference. They claim
you’d have to earn six to eight percent
annually to accumulate an amount equal to the
amount of the return of premium. Furthermore,
that invested amount will eventually be taxed,
unlike the ROP refund.
Regardless, before plunging
into a return-of-premium policy, talk with your
financial planner to see what is really the
best option for you.