Something I frequently discover working in the insurance world is other insurance brokers trying to convince all of their term life insurance clients to add on the return of premium rider. However, while the prospect of getting every penny of your cash back seems wonderful, is adding the return of premium rider suitable for you? This rider, or additional policy benefit, raises the policy holder's price, although at the completion of the term, if the insured has not died, the policy owner receives back every dime he has paid in premiums. This extra benefit can elevate the premium anywhere from 30% to 200% of the level term with no rider added. There are two schools of thought here: Some figure, "Why should I mind paying double the premium, since it will all end up in my pocket one day?" Other folks, however, want to pencil out the details and tally whether or not adding the extra benefit is a wise financial decision for them. The answer, of course, is that it depends on some variables, which we'll discuss.
But first, let's address life insurance with the ROP benefit acting like an investment. Specifically, it's not, to be exact, but here's how some investment-savvy folks see it. To appraise what sort of dollar benefit, or return on investment, you'll derive from return of premium, begin by taking note of what the cost of the rider is. Now, if I were to invest that amount in a traditional investment, how much would I have to gain to end up being equivalent to the total premium I'll have returned to me at the termination of my policy?
For example, if your return of premium policy costs $500 more per year than your regular term policy, and 20 years down the line, your return of premium policy will pay you back $25,000, then you can do some quick math on a financial calculator and find that if you were to take that $500 and invest it elsewhere, you'd have to earn about 9% in that investment for it to grow to $25,000. Well that's a slam dunk in my book. I'll settle for 8 or 9 percent any day of the week, especially knowing it's guaranteed money.
It won't be so clear-cut for everyone, though. Health and age are the primary factors that will affect how attractive your internal rate of return is, with the length of term and amount of face value being factors as well. If you're between the age of eighteen and thirty-five, in super condition, you'll most likely get an internal rate of return approaching double-digits. You might only get a 5-7% internal rate of return, however, if you're in your 40's or 50's. Again, health plays a factor too. Next, you'll want to go with a twenty or thirty year term, as those have the best return on investment.
One excellent feature of Return of Premium Life Insurance is that currently, the taxes you'll pay on your return of premium are 0! Uncle Sam can't tax it because you don't get back a dime more than you put in, meaning you didn't actually "earn" any interest. So even if your internal rate of return is just 6%, that's still a terrific net rate.
One more thing before we wrap this up: Don't buy ROP unless you're committed for the long haul. Let your policy lapse half way through the term, and you might get back 20% of your premiums in surrender value. Hold it until the end of the term, and get back 100%. Be smart and plan to hold on to this policy. Last, even if you're not the perfect candidate to purchase term life insurance with return of premium, I'm not condemning its purchase. No matter how expensive it is, it actually costs nothing more than the time value of money, since you it's all reimbursed, and that's one insurance payment we can all feel comfortable paying.
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