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New policy combines term and permanent life

Finally! There seems to be a solution to the Great Life Insurance Debate: term vs. permanent.

For years, the argument has raged. What's the best kind of life insurance to buy? "Term is the cheapest," one side argues. "Permanent has an investment aspect," retorts the opposition. "But it's a terrible investment."

And so it goes, back and forth, reminiscent of yet another historic argument: Tastes Great. Less Filling.

But recently, as the two insurance titans continued to battle it out, a newcomer has stepped into the ring, one that not only offers a middle ground but which may overcome both giants.

It's called Return of Premium Term (ROP). And some believe it's the hottest thing on the market right now.

Return of Premium gives a policyholder the benefits of standard term insurance, but gives you all your money back -- and then some -- if you're still alive at the end of the term.

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"It's really a tremendous product for the consumer," says Brian Holland, a self-employed insurance agent in Fort Lauderdale, Fla. "It really helps to overcome the traditional objections to buying life insurance."

To understand Return of Premium, it's important to look at life insurance in general.

With term, the policyholder pays a premium each year to the insurance company for a fixed period, usually from 10 to 30 years. If you die during this time, the value of your life insurance will go to your beneficiaries, which you name when you buy your policy.

When you're in you're 20s or 30s, the cost of term insurance is pretty low. But as you get older and your health starts to deteriorate, the cost goes up. Still, with term you know exactly what your premiums will be for a fixed number of years and it's very affordable life insurance protection.

But there are some major disadvantages. The big one is that your family only gets money back if you die. If you're still alive at the end of the term, or if you cancel your policy, no benefits will be paid.

With permanent life, be it whole, universal or variable, there's an investment component to build cash value in addition to the death benefit. But building cash value means paying higher premiums, so these policies are much more expensive than term insurance.

Return of Premium Term appears to solve the dilemma of which insurance to buy. If you die, your family receives a lump sum of money. But if you live through the term, the insurance company promises to return all of your premiums.

"It's really the latest and greatest thing out there," says David Hefferly, general agent for U.S. Broker in Charlotte, N.C., who has been selling ROP Term. "It's a concept that offers both investment and insurance. Instead of putting your money into a mutual fund that may go down in value, you can put your money into this and get your money back."

Of course, you can't get something for nothing. The cost of Return of Premium Term policies is higher than for a regular term policy. But the benefit of getting all your premiums back outweighs the additional cost, say insurance agents.

For example, a 30-year-old takes out a $150,000 regular term insurance policy and pays $269 a year in premiums, says Hefferly. That's $8,070 over a 30-year term. At the end of that period, assuming he's still alive, the policyholder will receive nothing from the insurance company.

With ROP Term, the same person would pay a little more -- $286 a year -- in premiums. However, after 30 years, he or she would build up cash value of $8,595 and get back every cent.

If you're 50 when you buy, you'd pay $798 a year for a 30-year term policy. That's $23,940 in premiums over the policy term. An ROP term would cost that same person $946 a year, but they'd build up cash value of $28,395 after 30 years, which they can redeem.

"ROP Term is really the best of both worlds," says Hefferly. "It's a bit like buying a new car, making the car payments every month and then getting all those payments back."

Regular term insurance is a low-cost way of protecting your family if you die, Hefferly says. But you never build up any cash value. And what happens if you outlive the policy, he says?

"At 30, you may be in great health and decide to buy a 20-year policy. But at 50, your health may have changed drastically and then you might not get insurance."

Some companies charge policyholders an annual fee, whether it's a regular term or ROP Term. But those costs are only about $30 to $40 a year, Hefferly says.

So what's in it for the insurance companies that are in business to make money? "They figure that if 100 people buy an ROP Term, some are going to die," Hefferly says. "Some people will stop paying their premiums and some will make it to the end of their term."

Holland agrees. "I think one of the objections to buying life insurance is that people see themselves outliving the term and so they think of it as a waste of money," he says. "It's like car insurance where it's hard to see the benefits until you have an accident. Of course, with life insurance, you don't see the benefit until someone passes on.

"Here's a product that overcomes those objections. The price is so much less than permanent insurance and not that much more than term life. It's really a good product for the consumer."

What's more, you can surrender the policy during the term and get back a portion of the premium, Holland says. Premiums are returned on a sliding scale that builds up to 100 percent at the end of the term. So if you take out a 20-year policy, at year 15, you can expect to get back about 50 percent of your money. On the other hand, if you decide to surrender the policy within the first five years, don't expect to get a dime back. That's because carriers spend a lot of money to get your policy and only start making a profit if you stick around more than five years or so.

Prakash Gandhi is a freelance writer in Florida.

-- Posted: Sept. 23, 2003

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