It seems like a deal that’s too good to be true: Pay premiums on your term-life insurance policy, then get them all back if you don’t die during the 10, 20 or 30 years you are covered. It’s like getting insurance for free.
But like most too-good-to-be-true deals, this one isn’t quite as good as it appears. Most people can do better with a standard term policy.
So-called return-of-premium options were devised a number of years ago to boost sales of term policies, the simplest and least expensive type of life insurance. With term, the policy holder pays an annual or semiannual premium in exchange for a death benefit for survivors.
But the benefit is paid only if the policy holder dies within the period, or term, covered by the policy. Die later and the survivors get nothing, and the premiums seem to have been wasted.
That encouraged lots of potential customers to opt for variable, universal or whole-life policies that cover the policy holder for life and build up a cash value.
The return-of-premium option on term policies is meant to attract customers who want something to show for years of premium payments if they outlive their policies and their survivors don’t collect a death benefit. The premium is not returned if you die with the policy in effect and a death benefit is paid.
But you have to pay a larger premium to get this option, wiping out much of its value, if not all of it.
Transamerica Life Insurance (Stock Quote: AEG) offers a 40-year-old nonsmoking male a 30-year term policy for $800 a year. An identical policy with the return of principal feature costs $1,335 a year.
With the ROP policy you would get back the $40,050 spent on the premiums over 30 years.