Return of Premium (ROP) Term Life Insurance
The decision to buy life insurance is not difficult but
selecting the right type of policy is critical to making
sure your family or business is adequately protected. When
considering return of premium term insurance there are
a number of factors that should be reviewed. Following
is a checklist of the most important things to consider
when buying ROP term insurance.
- Price. Don’t make the mistake
of buying a return of premium policy based on price alone.
Scrutinize all of the items on this checklist as there
are likely reasons to pay slightly more for a better
company or more comprehensive benefits and policy options.
Company Financial Strength. The
market volatility since the year 2000 has magnified the
importance of selecting a very highly rated insurance
company. This is especially true when buying return of
premium life insurance as there is a cash value associated
with ROP policies. Before buying any policy, make sure
you checkout the independent financial ratings of the
companies you are considering. These ratings can be found
at the following independent rating services: AM
Best, Standard & Poor’s, Moody’s, Fitch and Weiss
Research. You may also contact
MEG Financial at (877) 583-3955 for ratings and comparisons.
Long Are Do You Need the Coverage? In
most cases, it makes very little sense to buy an ROP
term policy unless you are going to keep the policy until
the end of the level term period. The reason for this
is if the policy is surrendered or lapses prior to the
end of the level period, there will be a significant reduction
in returned premiums. In fact, if you are not going to
keep the ROP term policy for the entire level term period,
you are much better off with an ordinary level term life
insurance policy without the ROP feature.
Surrender Value- Most return
of premium policies begin building cash value in the
6th policy year with the cash
surrender value gradually
increasing annually to equal 100% of all premiums paid
at the end of the level term period. With most ROP policies,
it takes several years for the cash surrender percentages
to be meaningful. For example, for a 20-year ROP policy,
if you surrender the policy in year 15 you may only receive
50% of all premiums paid. Before buying a policy, it
is wise to review the ROP cash surrender percentages
so that you are aware of the actual guaranteed cash surrender
values. For an example see, sample
schedule for return of premium cash surrender values.
- Cash Value Option. Some companies
offer two ROP schedules for returning premiums: a basic
cash value option and an enhanced
cash value option. The basic cash value option is
less expensive and returns a slightly lower percentage
of premiums beginning in the 6th policy year but guarantees
a 100% return of premiums at the end of the level term
period. The enhanced cash value option allows you to
pay a slightly higher premium to accelerate the percentage
of premiums returned in the early and middle years. This
option provides for the use of greater cash values in
early years but also returns 100% of all premiums at
the end of the level term period. The enhance option
costs more but not significantly more in some case. You
need to consider both cash value options if available.
For more information see, comparison
schedule of the basic cash value and enhanced cash value
options in return of premium term policies.
- Policy Loan Options. Most ROP term
policies offer a loan option after the 6th policy year.
In other words, if you need cash, you have an option
to borrow against the cash surrender value in the policy.
If a loan is taken, interest must be paid on any outstanding
loan balance. Each company offers different loan terms.
Therefore, you need to review the loan options available
before you buy any ROP term life policy.
- Underwriting. Underwriting is the
process where the insurance company evaluates you to
determine your rate for life insurance. Some of the important
underwriting considerations include your health and medical
history, avocations, MVR, foreign travel, hobbies and
lifestyle issues. Every insurance company uses their
own specific underwriting guidelines. Therefore, the
choice of policies will be affected by the way each respective
company evaluates your health. For more detail, see
the general life insurance underwriting guide.
- Conversion options. Depending
on your age, most companies offer a conversion privilege
which allows you to “convert” or exchange a
term policy for a whole life or universal life policy without
proving your health. The conversion option is invaluable
if your health changes and renders you uninsurable. If
everything else is constant, the life insurance company
offering the longer conversion period is the better choice.
- Policy Riders. Riders
are optional benefits that may be added to your policy
to meet additional needs. Most companies issuing return
of premium policies offer riders. Optional riders available
may include children’s
term insurance, waiver of premium for disability, accidental
death and dismemberment and accelerated death benefits.
If you are looking at buying return of premium term life
insurance, you need to look beyond the price of the policy.
Unlike simple level term life insurance, ROP term builds
cash value. Therefore, other considerations such as company
financial strength, loan options and cash surrender values
are very important. At MEG Financial, we want to help you
understand the policy differences and determine which policy
is best given your circumstances. 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!
Links for Return
of Premium Term Life Insurance
* MEG Financial is not providing tax or legal advice.
If you have tax or legal questions, please contact your
accountant or attorney.