When it comes to life insurance most financial advisers suggest "buying term and investing the rest." Their view is that clients who needed life insurance could often do better if they bought inexpensive term policies, ignored the more expensive cash-value plans and invested the difference in premiums separately.
But now, a relatively new product has some pros telling their clients to invest in a new kind of term insurance.
The new product, called return of premium, allows consumers to buy fixed term life insurance for 10, 20 or 30 years, pay higher-than-normal premiums, and then get all of their premiums back if they outlive the policy, as most will. It's priced attractively enough that some financial planners find it's a better deal for some of their clients than municipal bonds. After careful review, many feel that term life insurance with complete return of premium is an excellent value.
Here's why: The insurance industry, which sees return of premium riders as a great marketing tool for selling term policies, is pricing the riders so that they actually earn a reasonably high rate of return -- if a client hangs on to the policy for its entire term. Independent analysis of some plans has determined that young healthy clients can earn about 7 percent, tax-free, on the extra premium that they pay for a 30-year policy.
Here's an example: A 25-year-old healthy male could get a $1 million 30-year level-term insurance policy for $770 per year, but he could also get it with a return of premium rider for $1,095 per year. The difference of $325 is the investment. At the end of 30 years, he gets back the total premium of $32,850. That amounts to an almost 7 percent return on the extra $325 that was paid annually. That return is not taxable because it's treated as a refund of premiums.
That's better than you would do on most comparable investments. Even the 20-year plans would return more than 5 percent to clients.
In almost every case, the return of premium term plans were a better investment than comparable whole life policies or municipal bonds.
That doesn't mean everyone should jump at these plans. Life insurance is priced individually; what's good for one person may not be best for another. And there are other investments to consider before it makes sense to overpay for term life, just to be able to reclaim those premiums in two or three decades.
Here are some tips for approaching return of premium policies:
- Start by considering your life insurance needs. This only makes sense if you need the coverage (such as mortgage protection or other family needs) and are young, healthy and well-heeled enough to afford a good term policy that really will protect your family if you die.
How much is that? Many well respected analysts, financial planners, investment advisers and CPAs suggest you calculate how much annual income your family would need without you, and multiply that figure by 25.
- Compare one good policy to another. There are only a minority of companies offering return-of-premium riders on term plans, according to LIMRA International, an industry research organization.
Request a quote from a company that compares at least a dozen or more different insurance companies in order to find the best term policy from the best company at the best price for you, and then compare it to the best return-of-premium policy you can find.
- Do the math. Once you have quotes for the two sets of premiums, use a financial calculator (or find someone to use one for you) to figure out the rate of return on your extra premiums if you were to get them all back.
How the Return of Premium Option works:
- Purchase 10, 20, or 30 level term and choose the Return of Premium Option for an additional premium.
- You pay guaranteed level premiums for the term selected, which provides death benefit protection. As with any term policy, if you die while the policy is in effect, the death benefit is paid to your beneficiaries, income-tax free.
- If you are living at the end of the policy's level-premium term, you are guaranteed to receive a refund of all eligible premiums paid for both the base policy and the Return of Premium Option - income-tax free.
For example: a male client, aged 45, purchases a 20 year term policy with a death benefit of $1 million, along with the Return of Premium Option rider. Annually, the client will pay $1,645.00 for the term insurance and $1,760.00 for the Return of Premium Option, for a total premium of $3,405.00. At the end of 20 years, the client is eligible to receive $68,100, income tax-free (20 x $3,405.00.)(a), offering a rate of return of 5.93%.
Ask your MORTGAGE SERVICES Representative for a quick, no obligation quote.
