Premiums You Can Retrieve
For those who see term life insurance as a losing proposition -- live and you lose the money you paid in, die and, well, you're dead -- an old insurance product is back. Called Return of Premium (ROP) or Money-Back Term, these policies refund every penny paid in premiums if you outlive the 15-, 20-, or 30-year term of the policy.
There is a catch. The policies cost more -- perhaps 30% to 50% more for a 30-year policy -- than traditional term life. A healthy 35-year-old man might pay $550 annually for a basic $500,000, 30-year term policy, vs. $810 for one with the ROP feature. You can get policies for a shorter term, but they cost so much more -- sometimes six or seven times as much as simple term -- that Byron Udell, CEO of insurance brokerage AccuQuote, advises against them. American General Life & Accident Insurance is the biggest player in this field, but ROPs are also offered by Fidelity & Guaranty Life Insurance, United of Omaha Life Insurance, and Federal Kemper Life Assurance.
Does an ROP policy make sense? That depends on your answer to two questions: Would you earn more buying a cheaper term policy and investing the savings? Are you likely to cancel before the 30 (or however many) years are up?
In the example above, the ROP would cost $260 more each year than regular term insurance but would return $24,300 in premiums at the end of 30 years. That amounts to an annualized return of 6.6%, and it's tax-free because you're just getting back your own money. For someone looking for a conservative investment, such a policy could make sense, says Charles Hais, manager of the insurance department at Brecek & Young Advisors, a Cincinnati brokerage.
But remember, you get that return only if you pay the premiums for the entire 30 years. If you drop the policy before (most buyers of term life do), you'll get less, or perhaps nothing, in return for those higher premiums. "A company generally counts on people dropping the policies -- in order to pay the money to those who don't," says James Hunt, a life insurance actuary for the Consumer Federation of America.
If you've decided to use insurance as an investment vehicle, you ought to check out universal, variable universal, and whole life policies as well. These other types of insurance usually cost even more. But because they pay interest or dividends or allow you to invest in mutual funds, they have the potential for higher returns.
By Carol Marie Cropper