The latest hot product in Life insurance is the “Return of Premium” Term Life product. This is where the policy holder gets all their premium payments back if they live through the term of the policy. While this may seem an attractive feature, it does not come without an added cost. These policies are more expensive than a traditional term policy and when you compare the true costs of buying traditional term versus the “Return of Premium” term they don’t seem as attractive as they do at first.
Let’s use some actual numbers I obtained by calling one of those 1-800 CHEAP INSURANCE companies you always hear on the radio and TV. For a healthy 40 year old male, in the Bay Area, a traditional $200,000 30 Year Level Term Policy would run you about $30.63 per month, or $11,026.80 over the 30 years of the policy. For the same amount of coverage in a “Return of Premium” Policy it would run you $61.93 per month, or $22,294.80 over the 30 years. The traditional Term Policy leaves you with no residual value after the term is over, while the “Return of Premium policy would return the $22,294.80 back at the end of the 30 years, assuming you have lived up to the contract and haven’t given them any wiggle room in the contractual terms. Both purchasers in this example have enjoyed the security of knowing that if they had died their family would have had some protection to start over.
The “Return of Premium” would receive back their payments so they could argue that they actually enjoyed that protection for free. But, was it really free? They paid $11,268 more for the privilege of getting their money back after the 30 years, or roughly an additional 98% in cost. This can be called a “forced savings”, but it only equals about a 1.6% return if you were to consider the extra cost recovered was a return on the total cost. The real question is: Could you do better by buying a traditional term policy and investing the difference rather than buying the more expensive “Return of Premium” Policy.
Historically, large cap, blue chip stocks have averaged a little over 9% per year since the Great Depression, including the market performance since the recession that started in 2008. If you were to simply buy a traditional Term policy, and put the premium difference into an Index Fund of the S&P, you would do clearly do better than paying the extra premium incurred in the “Return of Premium” policy. Also, what if the additional cost of the “Return of Premium” policy makes only a smaller, insufficient policy affordable to you? Is that the point of this whole exercise? Sometimes names can be deceiving.
I have to give credit where credit is due! I got most of this information from in an article I read in the Franklin Prosperity Report (Jan. 2012), titled “Return of Premium Life Insurance: Worth the price?” by Joseph Dercole.
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