Brian Gruss Licensed Insurance Planner

Return of Premium Rider Makes Life Insurance Buying Easier

Since term life insurance policies accrue no cash value, most policyholders see no return on their investment unless they pass away during the policy’s term and a death benefit is paid out to their beneficiaries. This is true of any insurance policy—if your home never burns to the ground or your car accident history is squeaky clean, you’ll never see one dollar from your homeowners’ or car insurance.

Wouldn’t it be nice if your term insurance policy could act like a piggy bank for you—storing your premiums up for a full refund should you outlive the policy? Believe it or not, with the right rider added to your policy, it can. Unlike other types of insurance, many term life policies offer a return of premium (ROP) rider that guarantees a return of the premiums paid if you outlive the policy.

When a ROP rider is added to your policy, your premiums will increase. When determining whether the ROP rider is in your best interests, you must consider whether the funds paid for the rider would be better invested elsewhere.

As an example consider a ten-year term life insurance policy with a premium of $600 per year. If the ROP rider adds an additional $300 per year, you will pay $900 per year or a total of $9,000 over the life of the policy. At the end of that ten-year term, you will receive the entire $9,000 back from the insurance company.

Otherwise, without the ROP rider, you’d have an extra $300 per year to invest—but you would need to earn greater than 16% per year to accumulate $9,000 after ten years. In addition, refunds received under the ROP rider are tax-free, while you’ll pay income taxes on interest earned in your savings account.

There are certain conditions you must meet to receive the return of premium guaranteed by the rider. If you forget to make a premium payment or allow your policy to lapse, you may no longer be eligible for the full premium payout of your policy, so it is important to keep the policy in force or you will be wasting the extra premium dollars you send to the insurance company.

Tags: Accident History, Beneficiaries, Car Accident, Car Insurance, Death Benefit, Extra 300, Homeowners Insurance, Income Taxes, Insurance Company, Life Insurance Policies, Life Insurance Policy, Piggy Bank, Policyholders, Premiums, Rop, Term Insurance, Term Life Insurance, Term Life Insurance Policy, Term Life Policies, Types Of Insurance

Return of Premium Term Life Policies Worth Exploring

To the relief of many consumers, not really satisfied with either of the two types of traditional life insurance, insurance companies have started offering a third option.  Called Return of Premium (ROP) Term, this new product combines features of term insurance and permanent insurance.  The feature that gets buyers really excited about ROP Term is that at the end of the policy’s term, if you’re still alive, you get all your premiums back!  That’s right. Every cent you paid for the policy will be returned to you.

For many people, deciding between the two types of traditional life insurance has been an agonizing choice:  Term or Permanent Cash Value?  Term or Permanent Cash Value?  The question can go round and round in one’s head like the hamster on the proverbial exercise wheel.

The premiums are less for Term, but there’s no return on the investment unless you die during the 10 or 20 or 30 years that is the policy’s term and your survivors collect the death benefit.  With today’s long life expectancies, it’s likely that you probably won’t die before the policy expires.  You want to protect your dependents, but you may hate the thought of all those premiums paid and nothing to show for them if you live, which is what you reasonably expect to do.

On the other hand, you can build cash value with the savings component of a Permanent Cash Value policy — whether whole, universal, or variable.  Plus the guaranteed renewable feature is attractive, since you don’t know what your health may be years from now.  But Permanent Cash Value insurance typically costs two or three times as much in premiums compared to premiums for the same death benefit with Term.  Should you spend that much more on life insurance for the cash value and permanent features?  Can you afford to spend that much more?  It’s a hard call for many.

What a relief to have this third choice of ROP Term, an elegant solution that splits the problem up the middle. It’s like Term Life Insurance in that the policy is effective, as long as you pay your premiums, for a specified period of time, usually up to 30 years.  But it adds a cash value feature with the guarantee from the insurer:  If you pay your premiums and you live, we’ll give you your money back.

On a typical 20-year Level Term Life Insurance policy the ROP feature could cost from 25 to 50 percent more a year than a standard Term policy of the same period.  The additional premium, which the insurer invests, provides the cash for the returned premiums.  It’s like buying traditional term and investing an extra sum that will grow at a steady pace without risk. It’s not “free” insurance, but to the majority of people who — if they buy the coverage while still relatively young and consequently will most likely still be still living at the end of the policy’s term — it sure feels like it is.

The biggest determinant of the extra charge for a Return of Premium feature is the length of time until you get the premiums back. A 30-year policy is less costly than a shorter one because there is more time for the additional funds to grow. A 35-year-old male in good health might pay $970 annually for a 30-year, $500,000 Return of Premium policy. That’s $295, or 44 percent, more than regular term from the same insurer. A 20-year policy might cost $1,175, or more than three times the cost of regular term. A 15-year policy, at $1,645, is almost six times the cost of traditional term.

Is the investment component of the ROP Term policy a good investment?  By counting the extra premiums paid as the amount invested and the overall premiums paid back as the investment payoff, these policies pay annual returns of 2.5 to 9 percent–the longer the policy’s life and the smaller the extra premium, the better the return.  And for many people, there’s an additional return in tax savings.  If you invested the extra premium yourself, the net gain could be taxable.  Putting that amount into an insurance policy makes the total payback a refund of the premiums you paid, and thus not taxable.

You reap the big benefits from ROP Term if you keep the policy for the full term.  However, you can surrender the policy during the term and get back a portion of the premium.  Premiums are returned on a sliding scale that builds up to 100 percent at the end of the term. So if you take out a 20-year policy and cancel at year 15, you can expect to get back about 50 percent of your money.  It’s unlikely you’ll get any return of premium if you surrender the policy within the first five years.  That’s because insurers only start making a profit on your policy if you stick around more than five years.

What if you bought a car, made the car payments, and then, when you’d finished paying for the car, you got all your car payments back?  Who doesn’t think that’s a pretty swell idea?  The new ROP Term Policy takes features from both Term and Permanent Life Insurance and rolls them into one very attractive alternative – just like getting all your car payments back when you finish paying for the car.

Tags: Cash Value Insurance, Consumers, Death Benefit, Dependents, Exercise Wheel, Hamster, Insurance, Insurance Companies, Insurance Insurance, Life Expectancies, Permanent Insurance, Premiums, Return Investment, Survivors, Term Insurance, Term Life Policies, Third Choice, Three Times, Traditional Life Insurance, Wheel

Is Premium Financing Right for You?

Asset building can be extremely complicated when looking to increase holdings without dipping into your base principal. Borrowing money to finance your acquisitions is often the easiest way. Such financing is extremely popular in the stock market in the form of margin accounts. The broker will, in effect, establish a line of credit for a trader to buy stocks so they do not have to use cash.

This same concept of financing an asset purchase is gaining popularity in the insurance marketplace with the growing practice of premium financing. Essentially, a policyholder enters into an agreement with a lender to pay an insurance premium on his/her behalf. And, as in any loan situation, the policyholder agrees to repay the lender for the cost of the premium, along with interest and fees.

Why would you consider premium financing? It is a technique that allows assets to remain invested that would otherwise be liquidated to pay premiums. On the flip side of the coin, it permits funds that would otherwise go to premium payments to be used for investing. Essentially it allows your money to “work” instead of remaining tied up.

The policy is financed by using its cash value and death benefit as collateral for the loan. If the policy is surrendered, the loan principal is repaid from the cash surrender value. If the policyholder dies, the loan principal is repaid from the death benefit.

There are, however, some important issues to consider before entering into a financing arrangement. These programs are designed for individuals with large life insurance needs and solid investment portfolios, i.e. good credit risks. Usually they purchase for reasons such as maintaining liquidity within their estate, transferring wealth or to establish business continuity.

The second area to examine is why you are choosing to finance rather than pay the premiums yourself. Financing should be used as a strategy to help achieve your estate planning objectives of amassing and preserving assets. Life insurance plays an important role in achieving these objectives, but it requires a significant financial outlay. While paying premiums can be viewed as a transfer of assets rather than an expense, utilizing current assets to pay premiums leaves that money dormant for the life of the policy. With premium financing, a policyholder can take capital that would have been used to pay premiums and invest outside the policy in other high yield assets.

The third issue to consider is the lender and their contract terms. Purchasing a cash value life insurance policy is a long-term investment; therefore it is important to pick a lender with proven longevity in the premium finance field. You want to be sure they will be around for the life of the policy. It is equally important that the lender be a specialist in premium loans. If premium financing is a side line business, you will probably not be offered the most attractive rates or terms.

To that end, you want to be sure the lender is offering a loan with competitive terms and flexibility. Look for a loan that matures upon the death of the insured as opposed to one with a stated call maturity. Call maturities open up the possibility of having to pay a loan off immediately and not over time, which is obviously more advantageous. Finally, be sure the loan spread is fixed and will not change over the life of the loan. You do not want to find yourself a victim of the instability of interest rates.

Tags: Acquisitions, Asset Purchase, Borrowing Money, Business Continuity, Cash Surrender Value, Death Benefit, Flip Side, Insurance Marketplace, Insurance Premium, Investment Portfolios, Life Insurance, Liquidity, Loan Principal, Loan Situation, Margin Accounts, Policyholder, Premium Financing, Premiums, Solid Investment, Stock Market