Level term life insurance is one of the most popular types of life insurance because it is inexpensive and allows you to purchase more coverage for less money. The reason why level term costs less is that it is only designed to provide coverage at a fixed price for a temporary period of time say 10, 15, 20 or 30 years. Once the initial level period expires, most level term policies can be renewed but usually at much higher rates. Additionally, level term life insurance builds no cash value.
Return of premium term insurance is a relatively new type of life insurance policy originating in the early 2000’s. The concept of return of premium, commonly called ROP term life insurance is simple. You buy a level term life insurance policy, usually for 15, 20 or 30 years, and pay a higher premium, generally 25-50% more, for the opportunity to get100% or your premiums refunded at the end of the level term period. In other words, if you outlive the level term period you will get all of your money back and generally all premium refunds are tax free!*
Level term life and ROP term are basically identical policies in terms of life insurance protection with the main difference being the extra premium charge for the equity build-up option in ROP policies. Therefore, the real key in comparing level term and ROP term is whether or not the extra cost for the return of premium option can be invested elsewhere and earn a higher rate of return than 100% of the returned premiums. The question that needs to be asked is, “What kind of rate of return can you expect if you invest the excess premiums payable for the ROP feature in an alternate investment and is it greater than the guaranteed rate of return with the ROP policy?” Once you identify the ROP policy’s rate of return, you can determine if that return is acceptable to you given your investment preferences.
For example, a 38 year old female, in excellent health, seeking a $500,000, 30-year level term policy would pay $430 annually while the cost for a similar 30-year ROP term policy would be $635 annually. Therefore, the ROP policy costs $205 a year more for 30 years ($6,150) for the opportunity to build cash value and to receive 100% of all premiums paid at the end of 30 years ($19,050 in this example).
To determine an effective rate of return, you would need to place the difference of premiums ($205 annually) in an alternative investment* with the goal of accumulating 100% of the ROP policy premiums ($19,050) at the end of the level term period (30 years). Based on the above example, the alternate investment would need to provide you with a 6.55% “after tax” rate of return in order to match the $19,050 (tax free) accumulations. Therefore, a return of premium policy would be a great option if a 6.55% after tax return is satisfactory given your investment profile.
Given the stock market fluctuations since the year 2000, almost any positive rate of return looks good and an “after tax” rate of return in excess of 5% is very attractive. Additionally, with ROP term, the cash values are contractually guaranteed by the insurance company and a specific cash value schedule is included in your actual policy. So there is relatively no investment risk* associated with ROP term insurance.
The effective rate of return for any return of premium term policy will vary based on your age, gender, health and especially the length of the level term period. Specific ROP term life examples with effective rates of return can be found by going to the links below. The amount of insurance in each example is $500,000 and the “preferred plus” or best non-smoking health class is assumed.
ROP Comparison, Male age 30, 15-year level term
ROP Comparison, Male age 30, 20-year level term
ROP Comparison, Male age 30, 30-year level term
ROP Comparison, Female age 30, 15-year level term
ROP Comparison, Female age 30, 20-year level term
ROP Comparison, Female age 30, 30-year level term
ROP Comparison, Male age 40, 15-year level term
ROP Comparison, Male age 40, 20-year level term
ROP Comparison, Male age 40, 30-year level term
ROP Comparison, Female age 40, 15-year level term
ROP Comparison, Female age 40, 20-year level term
ROP Comparison, Female age 40, 30-year level term
ROP Comparison, Male age 50, 15-year level term
ROP Comparison, Male age 50, 20-year level term
ROP Comparison, Male age 50, 30-year level term
ROP Comparison, Female age 50, 15-year level term
ROP Comparison, Female age 50, 20-year level term
ROP Comparison, Female age 50, 30-year level term
Is level term insurance the best deal or return of premium term life the smarter way go?
That question can only be answered by you! But having the facts, such as knowing the effective rate of return required when investing excess premiums (above the level term premiums) to accumulate an amount equal to100% of the premiums for the ROP option, is critical to determining which policy is best. At MEG Financial, we will be happy to review your questions or concerns with respect to ROP term life insurance and provide you a custom comparison of level term and ROP term life insurance. Call MEG Financial today at (877) 583-3955 or simply request a personalized return of premium term life quote. MEG can help you make the right policy choice!
- Advantages and Disadvantages of ROP Term Life Insurance
- Purchasing Return of Premium Term Insurance
- Why Buy ROP Term Insurance?
- Instant Return of Premium Term Life Quote
* MEG Financial does not provide investment advice nor do we give advice on tax or legal matters. For investment, tax and legal advice, please consult your appropriate professional advisor.