New policy combines term and permanent life
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."
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
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.
"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
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
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,
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