NOTE: This post is part of an ongoing education series. This information is for educational purposes only. This information does not constitute investment advice. Please consult with your financial advisor before taking any action. For planning advice contact Polaris Financial Planning.
Return Of Premium Term Life Insurance
Insurance is a sensitive topic and there can be a lot of emotion wrapped in the decision about how much to buy and what kind you should get. I will not talk about why you may need insurance or how much to get in this post. You can see my previous post of term vs. whole life here.
Today we will assume that you have already decided to buy insurance in the amount of $500,000 and you want 30 year level pay. Level pay means that you will pay the same amount for 30 years. Because it is term you insurance, it will end after 30 years.
Just for an example, lets assume that you are 35 years old, do not smoke or engage in risky activities and you are in really good health. I looked around the web and I estimate that the cost for this life insurance is $538 per year (Your findings will likely be different - this is simply for a demonstration and is not a quote). The total cost over 30 years is $16,140. Not bad for $500,000 of life insurance.
You could also get a another product. It is called Return Of Premium Term or ROP Term. It costs a little more but after 30 years you get all of the money back! The cost for our example is $1,100 per year for a total of $33,000 over 30 years. Sure it’s a little more but you get all of the money back. Sounds good!
So… is this a good product for you?
Before we go on, I want to look at a few of my basic investing rules. You should not break these rules.
1 If it sounds too good to be true – It probably is.
2 KISS = Keep It Simple Silly. Think of this as the Financial Occam’s Razor. The product with fewer variables is likely the better product.
3 Only buy what you understand. If it is confusing, you should say NO. If you understand it later – you can buy it then.
4 Buy term and invest the rest.
How does Return of premium term stack up to my rules?
1. Getting all of your money back sure does sound too good to be true.
2. This is not simple! It has more variables and may have more conditions in the prospectus.
3. This product is not that hard to understand. (maybe that is why it sells so well)
4. It is not really term.
Looks like it breaks 3 of the 4 rules.
Here is some math….
If you follow rule 4 above you would just get the term and invest the rest. You could take the $562 you save each year and put it in a long-term bond index fund. In a long-term bond index you could get 5% (it was even higher in the past). If you make 5% every year, you will have $39,205.56 after 30 years. Greater than the $33,000 they would give back (if you get it back). Plus you can take out the money any time you need it.
If you are a more aggressive you could put the $562 into nice stock index fund. If you make an annual return of 10% will have $101,690.20 after 30 years.
So…. which one do you want now?