Refund Guaranteed
With return-of-premium policies, you bet your life you'll get money back.
By Kimberly Lankford, Contributing Editor
From Kiplinger's Personal Finance magazine, March 2006
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Jorge Ramirez is expecting a life-insurance payout before he dies. If he lives another 20 years, he'll get a windfall of more than $26,000. Last year Ramirez, 42, bought a term-life policy with an interesting new twist: If he survives to the end of the policy term, he gets back all of the money he paid in premiums.
Return-of-premium, or ROP, policies are becoming a popular alternative to standard term-life insurance, for which you pay the lowest premiums but get nothing back if you outlive the term. Ramirez wanted coverage that would last until his children, 14-year-old Susana and 8-year-old Jorge Jr., were grown. When he went to shop for a policy, he found that insurers were charging up to $1,500 for ordinary term-life policies providing $500,000 worth of coverage. At $1,332 per year, AIG's return-of-premium policy was still in the ballpark, and Ramirez figured he'd get back the money just as he was about to retire. "If I take care of myself, I'll probably be around in 20 years," he says. "I was looking to see if I could get something back while I'm still alive."
Premiums for term-life policies have dropped drastically over the past decade. In 1994, for example, a 40-year-old man couldn't get a 20-year, $500,000 policy for less than $995 per year. As a result, healthy people with older policies may be able to switch to ROP coverage without boosting their premiums too much. "Term rates are at all-time lows," says Robert Bland, chief executive officer of insurance brokerage Insure.com. "So it's tempting to pay a little more and get it all back."
A good investment? A check for $26,000 (or whatever you paid in premiums) sounds like a great deal. But you may not be getting the biggest bang for your buck.
Ramirez could have paid $405 a year (instead of $1,332) for the same coverage with a regular 20-year term policy and invested the $927 difference in premiums. As long as his investments returned more than 3.1% per year, he would have come out ahead.
A 30-year ROP policy can be a better deal if you need insurance for a longer time, because the premium differential between the two kinds of term policies is much smaller. For example, a healthy 41-year-old man would pay a premium of $930 a year for a regular 30-year, $500,000 term policy and $1,425 for a return-of-premium version. If he invested the annual difference of $495 himself, his investments would have to return at least 6.2% a year to accumulate more than the nearly $43,000 he'd get in returned premiums. Because life-insurance premiums are a moving target, it's a good idea to use a Web site, such as AccuQuote.com or Insure.com, that includes up-to-date prices from many companies.
If you drop an ROP policy before the term is up, you may get some of your money back. But payout amounts vary from company to company, says Byron Udell, CEO of AccuQuote. His favorite policies right now are from insurance giants AIG and Genworth Financial. Genworth offers the best deal on early payouts, he says: 60% of the premiums you've paid if you drop a 30-year policy after 15 years.
Although Ramirez considers his return-of-premium policy to be an easy way to save some extra money, he bought it to protect his kids if anything happens to him. "I will be delighted to get the money back," says Ramirez, "but it's really a question of securing my kids' future."