Getting a payback
Return-of-premium term life insurance policies reward you for staying alive
Insurers tend to promote policies of 30 years as financially most sensible. But that's a lengthy commitment many people may have trouble keeping. People are notorious for letting their coverage lapse because of changed family conditions, budget constraints, or the lure of a better rate at a different firm. Drop out early with a return-of-premium policy, and at best you'll get back only a portion of your premiums--perhaps 10 percent after 10 years on a 30-year policy, building to about 35 percent or so by year 20. In the unkindest cut, if you do die your heirs will get the policy's face value just as if you had bought the cheaper regular term. "You will have greatly overpaid for your insurance," says Peter Katt, an insurance adviser in Mattawan, Mich.
Though overall sales are still small, insurers report particular interest for the policies among younger folks. Single parents, especially young women, are keen on the coverage, says Beth Hempel, a product development manager at Mutual of Omaha. "They are very concerned about leaving a dependent without support but young enough that they really do not think their beneficiary will ever collect anything."
Fair return. Though these policies aren't sold as investments, the return from sticking with one may not be all that bad. By counting the extra premiums paid as the amount invested and the overall premiums paid back as the investment payoff, AccuQuote figures annual returns of roughly 2.5 to 9 percent on a sampling of policies--the longer the policy's life and the smaller the extra premium, the better the return. (You'll need a financial calculator to estimate this yourself.) A bonus: If you invest this way on your own, the net gain may be taxable; wrapping this up in an insurance policy makes the total payback a refund of the premiums you paid, and thus not taxable.
If considering return of premium, compare the extra cost of an insurer's policy not just to its own traditional term but also to regular term at competitors. And no matter what, be ready for some salesmanship. Return of premium might be pushed after you express interest in lower-cost regular term. It's hard to ignore a pitch that rewards staying alive.
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