Return of Premium Life Insurance

It sucks, doesn't it?  You pay good money for auto insurance, six months goes by, and darn it, no accident!  Isn't that what you are thinking everytime you renew your auto insurance?  How about fire insurance for your house?  It's just money down the toilet if your house didn't burn down, isn't it?  Well, the insurance companies have figured it out.  They know that if you get a 10 year level premium term life insurance policy, it means that you're going to be awfully disappointed to find yourself still fogging up a mirror ten years from now.

Or is that not how you would feel?

Insurance is an cost to protect you from unsustainable or catastrophic losses.  Should that loss not occur, there is no disappointment that you did not use the insurance.  Yet, when you are sold whole life or universal life policies, that is exactly what you are led to believe, "at the end of the ten years, if you're stilling kicking, that's money down the drain."

So, the insurance companies have now come up with a new way to get you to part with some extra money.  Return of Premium Insurance.  Actually, it's not nearly as bad as I am making it sound.  For the long term stuff, it can actually be pretty good.  So, here's how it works.

With a traditional term life insurance policy, you can generally select a level premium for a set period of time, usually 5, 10, 20 or 30 years.  The longer the level premium period, the higher the initial premium.  Of course this is because the company is on the hook for your mortality for a longer period, and up to an older age.  Should that period end, and you are still with us, you get nothing.  The cost of the insurance was exactly that, a cost.  Not an investment.

Return of Premium Insurance is intended to be an alternative for term insurance, so that at the end of the policy period, you're not left empty handed.  In fact, you get back every dollar that you paid to the insurance company, minus fees.  Still not an investment, but it's a pretty fat rebate.

But is it a good deal?  Well, I ran insurance quotes on myself for my age, gender and health situation (knock on wood, I'm still pretty healthy).  You can see the details on the attached spreadsheet.

How the insurance company makes their money is obvious.  They charge a little extra for the ROP insurance, they invest your money for 10, 15, or 30 years, and at the end give you back what you started with.  They keep any investment earnings.  If you die before that period is up, they lose.  But it's not like you win or something.

So, in order for it to be worthwhile for them, they need to change the pricing structure.  Instead of charging more for longer term ROP policies, they charge LESS!  So, the 15 year policy for me would cost $1,165 per year, the 20 year would cost $905 and the 30 year would be only $705!

My spreadsheet compares the two policies and assumes you invested the difference between the ROP premium and the traditional term premium.  You can change the earnings rate if you wish, but I used a very conservative 6%.

What you will find is that you will have quite a bit more at the end of the period in either the 15 or 20 year policies if you select the traditional term.  However, because the difference between the 30 year level premium and the ROP 30 year premium is so small, you would have more at the end of 30 years by taking the ROP policy.

Of course, you CANNOT miss a payment or default on the policy.  You will get some f'ed up pro-rated (but not equally pro-rated) amount back, but you will lose money if you do this.  I suspect that is why the long term deal works out in your favor.  They know that there is a high rate of default.  For example, if you get the 30 year ROP Term policy through Chase, and dilligently pay for 20 years, then cancel the policy or default on premiums, you will get 25% of premiums paid in return.  Ouch!  That's basically a 75% "fee" they have collected.

The bottom line:  do your own homework.  Everyone's situation will differ.  Make the decision based on how much insurance you actually need, and not on some hope of getting ANY money later.  If you purchase a return of premium policy, DO NOT LET YOUR POLICY LAPSE PREMATURELY!  Man, that's really important.  Did you feel how important I think that is?

Comments

[msd]

On a completely unrelated note, I don't think having ads in the middle of your posts is a very good idea.
Love your blog though. Keep up the good work.

[lamoneyguy]

Is it annoying? I had some click success with it, and wanted to try it a couple more times. I'll probably move it to the bottom in the future.

[John]

What ROP companies do you recommend?

[lamoneyguy]

John, I do not make specific recommendations. I would look for a financially stable company with reasonable rates.

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