Return of Premium Life Insurance Policies Pros and Cons

by Jeff Rose on March 6, 2017 · 2 comments

return of premiumSeveral 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.

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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……

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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 life 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, 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.”

Regardless of which kind of plan that you choose, or your feelings towards return of premium life insurance, it’s vital that you give your family the life insurance protection that they need. One of the most common reasons that people don’t buy life insurance is because they assume that it’s going to be too expensive for them to fit in their budgets. In most cases, this couldn’t be further from the truth.

There are plenty of ways that you can get an affordable life insurance plan to meet your needs. The best way to do that is to work with an independent insurance agent, like myself. Unlike a traditional agent, I represent dozens of highly rated companies across the United States, and I can bring all of the lowest premiums directly to you. Every insurance company is different, which means you could get drastically different rates depending on which company that you get the quote from. Don’t waste your time on the phone talking to different companies, let me do all of that hard work for you.

Picking The Perfect Plan For You

There are several types of life insurance policies that you’ll need to choose from when you’re looking to get coverage for your family. If you want to get the most affordable option, a traditional term life insurance plan is going to be the best choice. These plans are bought with a pre-determined expiration date attached to them, and after that date, they are no longer active and you’ll have to reapply for coverage. You can buy these plans in a variety of different lengths, anywhere from 5 years to 30 years. The biggest advantage to these plans, aside from their price, is that you can purchase a plan that matches the length of your life insurance needs. For example, if you have 20 years left on your mortgage, you can buy a 20-year term life insurance policy.

Have you considered the pros and cons of return of premium life insurance?  What is your opinion on it? 

If you have any questions about return of premiums life insurance plans, or about the different options available to you. Please contact me today. I would be happy to answer those questions and ensure that you’re getting the best policy to meet your needs. I know that finding the perfect plan can be a long and frustrating journey, but it doesn’t have to be. I can make the process as smooth and simple as possible. Don’t wait any longer to get the life insurance protection that your loved ones deserve.

{ 2 comments… read them below or add one }

Kelly Ramirez March 9, 2012 at 3:07 am

Hi Jeff and everyone! Just stopping by to say thank you for all this valuable information on this website! -Kelly, Richmond, VA, USA

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Tayo December 21, 2012 at 7:48 am

Thank you for the nice easy-to-understand video.

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