The Insurance Weblog

A Term Life Insurance Policy That Pays Back, Sometimes

This Christian Science Monitor column introduces a new breed of life insurance: term life insurance policy with Return of Premium (ROP) features. Unlike regular term life insurance, in which you lose all the premium if you outlive the term of the policy, in ROP policies you will get all your premium back if you survive the policy term.

As you can expect, ROP policies will be more expensive than regular term policies. In the quoted example, "[f]or a basic $500,000, 30-year term life policy a healthy 40-year-old man might pay $895 annually vs. $1,232 for one with an ROP feature."

Is this a good deal? If you just buy the regular term life insurance for $895, and save and invest the balance of $337 ($1,232 - $895) in the stock market, you will be able to get all the premium balance of $36,960 ($1,232 * 30) after 30 years if your investment turns in 7.82% annual after-tax return. It is actually a good guaranteed return for ROP policy holders.

However, the downside is for early withdrawal, your return on premium will be significantly less(the article quoted you will get 50% premium back if you withdraw after 15 years in a 20-year policy). In addition, if you die within the term, the payout is no different from the regular term life insurance.

The article correctly concludes that "you come out ahead with ROP insurance only if you hold the policy until it expires."

In terms of life insurance, I will only consider regular term policies. Insurance and investment are two very different activities and it does not make sense to me to get an ROP or universal life policy and have my choices limited.

(P.S. Bankrate has a similar story on ROP policies.)