My life insurance drama continues

[Goldy1]

So you guys heard me ranting about my life insurance choices lately.

I have first and last child on the way. I decided to go with 250K coverage and want a 30 year policy(my rational is that even tho 20 year terms are cheaper, it benefits us to lock in at a lower rate now) 250 is not a lot but house is almost paid off.
WE got quotes from All State (they were very high) and AAA which were lower than All State. I stopped looking for quotes and we got approved as pref non smoker for AAA but have NOT signed anything YET.

So my big dilema was return of premium versus term.
I decided on straight term with no ROP after doing extensive thinking and math. I realized with my AAA quote, if I invested the difference with term vs ROP, I would only need to get about a 4.5% retrun on my money, and money is NOT tied up.

So I am getting ready to go pay for AAA insurance I chose and I got cold feet(I am commitment phobe) thinking I might be paying too much, and realized I only got 2 quotes. So I got quick quotes online and on the phone quotes from ING. ING was cheaper for both of us! With the savings from both our policies combined, we can save $88 a year comparing AAA term to ING term, and we can save $163 a year comparing AAA ROP to ING ROP.

ING ROP is $282 a year more than same coverage as AAA term which is enticing.

Good news is ING can use the same lab work results AAA got.

My question is, if one buys ROP insurance, when you take the lump sum payment at the end of the insurance term, DO I HAVE TO PAY TAXES ON THAT money? I was told no b/c it is not more than what I paid into it, and I already paid tax on my premium. Just wondering b/c there are so many kinds of taxes and I assume they are subject to change.
I also need to find out how long AAA will let me sign my approved policy since they are now my "back up" to ING, an dI have to wait for ING to approve us or not.

thanks

[disneysteve]

Same answer I gave before. DON'T buy ROP insurance. Buy regular, plain vanilla, term coverage.

[maat55]

You only pay taxes on money you earn, if they give you only what you give them, you earned no money to pay tax on.

I can see where you would be gun shy, Uncle Sam is quite the pick-pocket.

[KatieNK]

What is ROP? Steve why is term best? What are the differences? Thanks

[disneysteve]

Katie, ROP is return of premium. It means that if you hold the policy for the entire term - 30 years - and you don't collect (you don't die during that time), they will refund you everything you paid in premiums. It is a great deal... for the insurance company. Most people don't keep their policies for the full term, or they die during the time they are insured. And even if you do get to collect your premiums back, they've had free use of your money for 30 years. You get back just what you paid in - no interest. So essentially, you are agreeing to give the insurance company an interest-free loan for 30 years with the possibility that you will get repaid, but a reasonable chance that you won't.

Anytime the insurance companies make things complicated, it is always to their advantage, not the customer's.

[KatieNK]

Thanks Steve. So the best is term? What does that mean? I would like to get DH higher coverage once we have kids.

[disneysteve]

Actually, ROP is a form of term with an added twist.

The two basic types of life insurance are term and whole life.

Term means that you pay to be insured for a certain amount for a certain period of time (the term). The term can be 10 yrs, 20 yrs or 30 yrs most commonly. Premiums are very low. If you die during the term, the policy pays out. If you don't die during the term, that's it. You get nothing back.

Whole life combines insurance with an investment, so each month when you pay your premium, part goes toward the insurance coverage and part goes into an investment account. The policy builds up a cash value that you collect when you die in addition to the insurance amount. You can also draw from that cash value while you are alive if necessary.

The problem with whole life is it is much more expensive than term and has lots of fees associated with it. It is much cheaper to buy term and invest the difference on your own. That gives you full access to your money and full control over how it is invested. Plus it avoids the high fees.