If you choose to keep this policy in force, you will be faced with annually increasing premiums that will typically start at 10 times (or more) the level premium you had been paying. If you choose to surrender this policy, you simply walk away. You no longer pay the premiums and the insurance company is no longer obligated to pay a death benefit.
A Return of Premium (ROP) policy is similar to a regular level term policy, but with one important difference: at the end of the level term period, if the insurance company hasn't paid a death claim (i.e. you are still alive!) they will send you a check for the total of all of your premiums. These policies have premiums that are higher than their "non-return-of-premium" counterparts, but there is some value in having your premiums refunded to you if you don't pass away.
This product has been marketed in the past as "zero cost term insurance" or "free life insurance". Of course, this isn't a fair representation, because it ignores the time value of money (i.e. interest that you could have earned on the extra premium that these policies require). Nevertheless, buying a return of premium policy might be a good option for you.
Here are several things to think about, both positive and negative, when considering the purchase of an ROP policy:
- + The internal rate of return on the excess premium is often in the range of 7%.
- + Your premiums are returned to you tax free, making this rate of return even more attractive.
- + There is a "forced savings" component to these policies.
- - You often have to pay for these policies until the end of the level term period in order to have your premiums returned. If you don't, the value of the excess premiums you've paid is often wasted.
- - You may have alternative uses for the extra premiums (like paying down debt, investing, etc.) that make better financial sense for you.
It is always good to have a professional life insurance agent and financial planner evaluate your situation before you decide.
Posts
