Several years ago, I had a client that was interested in purchasing a return of premium insurance policy. At the time I wasn’t really aware on how the policy works or the pros and cons to make an accurate recommendation.
That means I had some homework cut out for me. I decided to run some quotes, compute some numbers, and try to determine if it was really worth it. You can read more about my analysis on a ROP Life Insurance policies to learn more.
The article compelled a reader to share their own insights on purchasing their own return of premium policy with some nice numbers for you to chew on. If you’re considering purchasing ROP insurance, be sure to see his analysis and reasoning……
I recently read your article on Return of Premium policies for Term Life Insurance. I found that your numbers weren’t quite accurate and your analysis of the comparison to be off. I typed out a detailed response, but had to make some account to post it, which I’m not going to take the time to do, as it’s already almost 1am my time.
The Pros and Cons or Just Pros?
I was hoping you would either post it for me or do a follow up, as the information is quite useful and relative to any other number of aspects of where/how to use your money. The final part is me plugging for Dave Ramsey, because he’s the one that opened my eyes and got me on the path to financial peace. The comment is as follows. And most of all, thank you VERY much for your military service and protecting my rights and freedoms as an American.
“In your scenario, the break even annual return amount over 30 years is 5.85%, because that is the rate of return, so to say, on purchasing the ROP policy.”
In both policies, you’re spending the same amount of money every month. For the normal policy, you’re spending $720 on insurance policies and $460 on investing annually.
Cost of Return of Premium Insurance
For the ROP, you’re spending $1,180 (720+460) annually. After the end of 30 years, you have the exact same economic benefits. For the normal policy, you had coverage for $1,000,000 for 30 years, and an investment account worth $35,420.80. For the ROP, you had coverage for $1,000,000 for 30 years and a payment back from the insurance company for $35,400.00.
Inflation is not a factor here, because in both cases, you have $35,400 cash on hand, whether it’s a payment from the insurance company, or cashing out your investment account.
So you’re only question is, can you beat 5.85%, or whatever your break even is?
This is a very basic break-even analysis, and very easily comparable to whether you can beat it or not, such as, do you have $35,000 in credit card debt at 20%?
If yes, then you pick the normal policy and put the different on the credit card and prevent yourself from paying 20% interest on it. Can you buy a CD at 6%? That would be better (I know, where will you ever find a CD for 6%? I’m simply stating as an example).
Break Even Analysis on Return of Premium Insurance
To determine the break-even, simply open Excel, click on the “fx” button, click on “financials” and click on the “FV” formula (stands for “future value”). Select your rate of return (rate), making a percentage a decimal (so 5.85% in this formula is “.0585″), select your number of periods (Nper) which is 30 for 30 years.
Select your investment amount each period (Pmt) which is the difference in premiums between the policies (460 in this example) and select your present value (Pv) which is 0 (because you starting at year 1 and paying in the 460 at the end of the year), and select your “Type” as “0”, meaning you’re investing this amount at the end of the year. The formula inside the cell should look like this: =FV(0.0585,30,460,0,0)
Change the rate to see “what if” you get a better or worse return (make the 0.0585 into just 0.06 to see what a 6% return would give you over that same time). I’m not providing this info as a way to insult the author, but to help explain and educate anyone else who might read this and be curious about this type of stuff.
I currently have a Return of Premium 30 year policy that has been in place for 6 or so years. If I knew then what I know now, would I have gotten this policy? No, I would have kept the difference and paid off credit cards.
Would I have most likely blown that money on black jack, capt Morgan, and video games at that time? Yes. But unfortunately, we all make mistakes. Listen to Dave Ramsey (www.daveramsey.com), stay away from credit cards (you do NOT need to use them every month or have a bunch to have good credit), you do NOT need a car payment every month for the rest of your life, and make a written budget on paper on purpose.
People that have a clue are the ones that win at life and money, the people who never bother trying to find a clue are the ones who end up broke and crying for hand outs and woe-is-me.”
Have you considered the pros and cons of return of premium life insurance? What is your opinion on it?