Return of premium......?

[Mason]

27 years old male perfect health non smoker I like to buy life insurance but I don’t know were and what to get thru, State farm is expensive for me. I can spend 250-350 a year for life insurance what can I get and what is the best for that money? What is return of premium is that good the cost more I know that I get my money back is it worth it?

[jpg7n16]

With life insurance you need to take a couple steps to figure out which product is best for you and your situation:

#1) Why do you need life insurance?
#2) How long do you need the coverage for?
#3) How much coverage do you need?
#4) How much room in the budget is there for insurance?
#5) Which company offers the amount of coverage you need, for the time you need it, at a price you can afford?

Luckily, State Farm isn't the only insurance co. out there You'll just have to do some searching online to find a company that fits #5.

But since you have about $300 or so, you're probably looking at a term policy as your best bet. It's the only one that gives enough coverage for a smaller amount.


For return of premium provisions, here's how that works. You'll notice that the return of premium policies will cost more - because they deliberately overcharge you to compensate for the extra risk they are taking that you'll outlive the period.

ex. (I'm making up these numbers to prove a point not show actual rates) 15 year ROP Term policy. Normal cost $500/year; ROP cost $575/year.

Say you die 10 years in. Well you would have paid (575-500)*10 = 750 too much. And you wouldn't get that back. But if you outlive the 15 year period, you get all your money back - with no interest, but tax free.

Return of Premium Life Insurance

The insurance company is compensated by investing your premiums over the 15 years, and also makes more than they should when people die during the term. So they make less when people outlive the term, and make more when they don't.

[disneysteve]

Return of premium is NEVER a good deal. There is never a reason to buy it. It is a scam basically. Buy plain vanilla term coverage and invest the difference. You'll come out ahead every time.

[jefffou]

With life insurance you need to take a couple steps to figure out which product is best for you and your situation:

#1) Why do you need life insurance?
#2) How long do you need the coverage for?
#3) How much coverage do you need?
#4) How much room in the budget is there for insurance?
#5) Which company offers the amount of coverage you need, for the time you need it, at a price you can afford?

Luckily, State Farm isn't the only insurance co. out there You'll just have to do some searching online to find a company that fits #5.

But since you have about $300 or so, you're probably looking at a term policy as your best bet. It's the only one that gives enough coverage for a smaller amount.


For return of premium provisions, here's how that works. You'll notice that the return of premium policies will cost more - because they deliberately overcharge you to compensate for the extra risk they are taking that you'll outlive the period.

ex. (I'm making up these numbers to prove a point not show actual rates) 15 year ROP Term policy. Normal cost $500/year; ROP cost $575/year.

Say you die 10 years in. Well you would have paid (575-500)*10 = 750 too much. And you wouldn't get that back. But if you outlive the 15 year period, you get all your money back - with no interest, but tax free.

Return of Premium Life Insurance

The insurance company is compensated by investing your premiums over the 15 years, and also makes more than they should when people die during the term. So they make less when people outlive the term, and make more when they don't.

Excellent Post....

Return of premium insuance is essentially insuring that your premiums are used for SOMETHING. Whether it's an insurance death benefit or a payback to the policy-holder at the end of the term, the premiums paid do SOMETHING.

Here's an additional calculation to consider.

Let's say that, using JPG's numbers, the extra $75 per year ($575-$500) bought a payoff of $8,625 (15 years X $575) back to the policy holder at the end of the term. This amount would be an equivalent of a 25.56% return on the extra annual $75 spent to return the premiums paid. Obviously, in this case (as JPG said, these numbers are made up) this would be a FANTASTIC deal. It is also assumed that the two policies considered were alike in every other way except for the return of premium portion for one to come up with a "return on investment" of the additional premiums as done here.

For my own purposes, I have generally seen those numbers stay in the 4% to 8% range. And as JPG said, one has to consider actually dying during the term. If death occurs, while owning a return of premium policy, the death benefit received is proportionally less that it should have been based upon the premium dollars paid.

[jpg7n16]

Let's say that, using JPG's numbers, the extra $75 per year ... would be an equivalent of a 25.56% return ... Obviously, in this case (as JPG said, these numbers are made up) this would be a FANTASTIC deal.
...For my own purposes, I have generally seen those numbers stay in the 4% to 8% range...

Hey thanks for doing the math on that. I've always known they're higher, but never calculated it out. According to this site: ROP Life Insurance | Return Of Premium Term Life Insurance >>>>> they said that the ROP premiums can by up to 3x the normal term premiums.

So my numbers were very favorable hah That $575 should be more like $1000-1500 apparently (7% would be $1240). And if you die 10 years in, you've paid $5,000 to $10,000 too much.

Rest assured, someone somewhere in the insurance company is doing the calculations to make sure the company will make money on the contract.

[disneysteve]

Something to keep in mind with return of premium policies is that most people don't keep their policy for the full term. They cancel. They let it lapse. They switch companies. Whatever. So all the extra that gets paid in for the ROP feature goes to waste.

[Hector]

Hey thanks for doing the math on that. I've always known they're higher, but never calculated it out. According to this site: ROP Life Insurance | Return Of Premium Term Life Insurance >>>>> they said that the ROP premiums can by up to 3x the normal term premiums.

So my numbers were very favorable hah That $575 should be more like $1000-1500 apparently (7% would be $1240). And if you die 10 years in, you've paid $5,000 to $10,000 too much.

Rest assured, someone somewhere in the insurance company is doing the calculations to make sure the company will make money on the contract.

Why dont you ask for exact quote for both and compare them before deciding not to go with return of premium term life insurance?

[jpg7n16]

Why dont you ask for exact quote for both and compare them before deciding not to go with return of premium term life insurance?

Because that's a lot of effort to look into something I'm not going to consider - for the reasons that Steve, Jeff and I listed above.

And then they'd send me a bunch of mail and call me as a lead all the time. Big pain, no gain.


I usually default to "buy term and invest the difference" except for cases where the nature of the insurance need dictates that that won't work (business buyouts, estate liquidity, etc.)