Return Of Premium Life Insurance - The Pro's and Con's
What is Return Of Premium Life Insurance (ROP) and are the benefits worth the added cost? There are several facts you should consider before purchasing that ROP policy that your agent is suggesting to you. ROP is a great product and many consider it to be "free life insurance", however, there are a few facts you should know first..
What Are The Advantages Of A ROP Life Insurance Policy?
- If you outlive the term of the policy, then you'll receive the entire premium paid during that period. For example, let's say you start a $250,000 20 year term ROP Life Insurance Policy at age 38 that costs you $45 per month. When you reach age 58, then you'll get a lump sum payment of $10,800 and your policy is terminated. Essentially, this is a win-win situation. Your family is covered for the next 20 years and you get your money back if you don't die.
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- Buying a return of premium life insurance policy will make you more vigilant in keeping your insurance policy active. Many people let their term life policies expire with the attitude that they can just "re-apply" and buy a new policy later. When you have a ROP policy, if you let it lapse, then the insurance company will keep the extra "rider" premium and you lose the premium pay back. This vigilance is good since it makes you maintain coverage for your family.
.- The extra rider on the premium earns about 7% interest during the policy term. This is the amount of return that is needed in order to give you your full premium back at the end of the term. Many high roller investors may consider this a low return, however, when you consider that many short term rates are now below 2-3%, it's not a bad interest rate. It's comparable to a safe bond fund.
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What Are The Disadvantages Of A ROP Life Insurance Policy?
- The policy costs about 30% more than a standard term life policy. This is what agents refer to as a "rider" on the premium. Now , the next question you may be asking yourself is... "why pay the added premium when I can just buy a regular term life policy and invest the difference in the stock market?" You could do this and it may be a sound strategy, however, the 7% return is guaranteed if you outlive your policy and if you don't, then your family collects the benefit. The returns from other riskier investments may be more unreliable.
.- If you let your policy lapse, then you lose the right to return of premium. The agent will then get to keep the rider amount. This is assurance to the agent that you will maintain the policy with them. If you don't keep it active, then you lose it.
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