Return-of-Premium (ROP) Term Life Insurance
Term life insurance tips usually include information about a return-of-premium policy. Comparing a standard term policy to a return of premium policy is one way to ensure that the best possible term policy is in force.
One advantage of a standard term life insurance policy is that it is cost effective. A disadvantage is that it does not build cash value or return any part of the premium paid. A policy owner could pay the premiums monthly for 10 or more years and, if alive when the term ends, feel as though the money has not been spent wisely. For those who feel they might outlive the term, a term life insurance tip is to purchase a return-of-premium policy.
An ROP policy is understood to be a wrapper around a standard term policy. When purchasing an ROP term life insurance policy, the policyholder will pay the premiums for the duration of the term in the same way he or she would with a standard term policy. If, however, he or she outlives the term, the premium is returned, which means the cost of the policy is zero. The policyholder can choose the amount to be returned: Either a portion of all premiums paid or the entire amount. If the policyholder dies during the term, his or her beneficiaries receive the death benefit just as they would with a standard term policy.
The two main benefits of an ROP policy over a regular term policy are that it offers a cash-back return and provides a loan option. The loan option is much like that of a permanent life insurance policy in that the loan can be used for estate planning and additional retirement savings. Provided the premiums are paid according to the contract, the amount paid in premiums will be returned.
The type of contract chosen determines the cost of the premium paid on an ROP policy. A policyholder can choose between having the entire amount of the premiums returned and a percentage of them. The higher the amount premium returned, the higher the amount of the premium.
Figuring the Rate of Return on a Return-of-Premium Policy
ROP term life insurance tips include figuring the amount of return. Based on statistics, a man in the United States faces a 5% risk of dying before he turns 61. Risk factors such as age, sex and health combined with the return of the premium can make a 20-year ROP policy between two to three times more expensive than a standard term policy. An ROP insurance policy, however, can be thought of as a savings account because the money is available at the end of the term.
For example, a 40-year-old woman can buy a 30-year term policy with a death benefit of $1,000,000 for around $650 per year. An equivalent return-of-premium policy for that same woman might cost around $1400. The returned premiums on this policy would yield about 5%, which is higher than the current yield on Treasury bonds and bills.
Do Not Let an ROP Term Policy Lapse
Insurance companies offer ROP policies because the number of policyholders who die within the term is relatively small. They also know that a portion of the policies will lapse, meaning that the policyholder ceases to pay the premiums. The “lapse rate” is the number of policyholders who allow their ROP policies to expire prior the end of the term. An individual who buys a return-of-premium policy for a term of 20 years and then allows the policy to lapse in year 13 forfeits the death benefit paid to the beneficiary and the majority of the amount that would have been returned at the end of the term.
Like permanent insurance, ROP term insurance has a surrender value. While almost all life insurance companies will return some of the premium at surrender, it may not exceed 9% of the total premiums paid if it is surrendered between less than halfway through the term.
Return-of-Premium Term Life Insurance Tips for Suitability
Just like a standard term life insurance policy, an ROP policy is best suited for young individuals who need to protect dependents, but who can afford higher premiums amounts. Because of the prospect of having the money returned at the end of the term, an ROP policyholder should be financially disciplined during each year of the term. In order to have premiums returned, he or she must commit to paying the premiums according to the terms of the contract. While underwriting classes will be different for each company with which an ROP policy is quoted, as with all life insurance policiess, people in the Preferred Plus and the Nonsmoker classes will pay less in premiums.
If a policyholder is not as disciplined financially as he or she needs to be to make sure that an ROP policy does not lapse, there is an alternative. An enhanced return-of-premium policy will allow the policyholder to borrow against his or her policy. The terms of the loan will vary among life insurance companies, but a policyholder can usually borrow against the policy after it has been in force for 10 years.
An enhanced ROP policy will be more expensive than a standard ROP policy, but the ability to borrow against the premiums paid provides a cushion that will allow the policy to remain in force if the policyholder needs emergency cash due to an illness, loss of a job or any other financially challenging event. The policyholder will usually be given the option to pay back the loan. If he or she does not pay it back, it will be deducted from what is returned at the end of the term.
The returned premium on an ROP policy is tax-free under both current federal and state tax law. As with all policies or insurance products that build cash over time, it is always wise to check to make sure the life insurance company has at least an A+ or better rating from AM Best, Standard and Poor’s and Moody’s.
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