Compare
Level Term Life with Return of Premium Term Insurance
Level term life insurance is one of the most popular types
of life insurance because it is inexpensive and allows
you to purchase more coverage for less money. The reason
why level term costs less is that it is only designed to
provide coverage at a fixed price for a temporary period
of time say 10, 15, 20 or 30 years. Once the initial level
period expires, most level term policies can be renewed
but usually at much higher rates. Additionally, level
term life insurance builds no cash value.
Return of premium term insurance is a relatively new type
of life insurance policy originating in the early 2000’s.
The concept of return of premium, commonly called ROP term
life insurance is simple. You buy a level term life insurance
policy, usually for 15, 20 or 30 years, and pay a higher
premium, generally 25-50% more, for the opportunity to
get100% or your premiums refunded at the end of the level
term period. In other words, if you outlive the level term
period you will get all of your money back and generally
all premium refunds are tax free!*
Level term life and ROP term are basically identical policies
in terms of life insurance protection with the main difference
being the extra premium charge for the equity build-up
option in ROP policies. Therefore,
the real key in comparing level
term and ROP term is whether or not the extra cost for
the return of premium option can be invested elsewhere
and earn a higher rate of return than 100% of the returned
premiums. The question
that needs to be asked is, “What kind of rate of
return can you expect if you invest the excess premiums
payable for the ROP feature in an alternate investment
and is it greater than the guaranteed rate of return with
the ROP policy?” Once you identify the ROP policy’s
rate of return, you can determine if that return is acceptable
to you given your investment preferences.
For example, a 38 year old female, in excellent health,
seeking a $500,000, 30-year level term policy would pay
$430 annually while the cost for a similar 30-year ROP
term policy would be $635 annually. Therefore, the ROP
policy costs $205 a year more for 30 years ($6,150) for
the opportunity to build cash value and to receive 100%
of all premiums paid at the end of 30 years ($19,050 in
this example).
To determine an effective rate of return, you would need
to place the difference of premiums ($205 annually) in
an alternative investment* with the goal of accumulating
100% of the ROP policy premiums ($19,050) at the end of
the level term period (30 years). Based on the above example,
the alternate investment would need to provide you with
a 6.55% “after tax” rate of return in order
to match the $19,050 (tax free) accumulations. Therefore,
a return of premium policy would be a great option if a
6.55% after tax return is satisfactory given your investment
profile.
Given the stock market fluctuations since the year 2000,
almost any positive rate of return looks good and an “after
tax” rate of return in excess of 5% is very attractive.
Additionally, with ROP term, the cash values are contractually
guaranteed by the insurance company and a
specific cash value schedule is included in your actual
policy. So there is relatively no investment risk* associated
with ROP term insurance.
The effective rate of return for any return of premium
term policy will vary based on your age, gender, health
and especially the length of the level term period. Specific
ROP term life examples with effective rates of return can
be found by going to the links below. The amount of insurance
in each example is $500,000 and the “preferred plus” or
best non-smoking health class is assumed.
ROP
Comparison, Male age 30, 15-year level term
ROP Comparison, Male age 30, 20-year level term
ROP Comparison, Male age 30, 30-year level term
ROP Comparison, Female age 30, 15-year level term
ROP Comparison, Female age 30, 20-year level
term
ROP Comparison, Female age 30, 30-year level
term
ROP Comparison, Male age 40, 15-year level term
ROP Comparison, Male age 40, 20-year level term
ROP Comparison, Male age 40, 30-year level term
ROP Comparison, Female age 40, 15-year level term
ROP Comparison, Female age 40, 20-year level
term
ROP Comparison, Female age 40, 30-year level
term
ROP Comparison, Male age 50, 15-year level term
ROP Comparison, Male age 50, 20-year level term
ROP Comparison, Male age 50, 30-year level term
ROP Comparison, Female age 50, 15-year level term
ROP Comparison, Female age 50, 20-year level
term
ROP Comparison, Female age 50, 30-year level
term
Conclusion
Is level term insurance the best deal or return
of premium term life the smarter way go?
That
question can only be answered by you! But having the
facts, such as knowing the effective rate of return required
when investing excess premiums (above the level term
premiums) to accumulate an amount equal to100% of the
premiums for the ROP option, is critical to determining
which policy is best. At MEG Financial, we will be happy
to review your questions or concerns with respect to
ROP term life insurance and provide you a custom comparison
of level term and ROP term life insurance. Call
MEG Financial today at (877) 583-3955 or simply request
a personalized return of premium term life quote. MEG
can help you make the right policy choice!
 Related
Links for Return
of Premium Term Life Insurance
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* MEG Financial does not provide investment advice nor
do we give advice on tax or legal matters. For investment,
tax and legal advice, please consult your appropriate professional
advisor.
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