Financial Services Blog

Life Insurance

Life Insurance with a Refund (Return of Premium)

When shopping for life insurance, make sure your advisor completely knows your financial situation as well as your needs during various years of your life. Your need for insurance is based on numerous factors, some of which include your current age and income, your marital status, the number of incomes in your household, your number of dependents, your long-term financial goals, the amount of your outstanding debt, your existing life insurance, and your other assets. You should also consider your overall financial, estate, and tax planning goals as part of your insurance needs evaluation.

There are many types of products in the life insurance arena.  Comparatively speaking, of all the different types of life insurance available, term life insurance is usually the least expensive. Generally speaking, term life insurance provides protection for a stated or defined period of time, usually from one year to 30 years. If you die during the coverage term, your beneficiary receives the death benefit from the policy.  But, most do not know that there are options with life insurance to obtain their premiums paid back to them. With a return of premium (ROP) TERM life insurance policy, you receive the return of all your premium payments at the end of the policy term if certain conditions are met.  If you are healthy you may want to use those premiums to help pay for a new term or permanent policy if your health qualifies.

Return of Premium Term and Next Generation ROP

Variations may apply, but generally ROP term life insurance coverage is for a specific number of years (term). The face amount of the policy, or death benefit, is paid to your beneficiaries if you die during the term. But unlike straight term, if you live longer than the term, all of your premiums are returned to you with ROP as long as the policy was in good standing and in force at the end of the term. Some insurers even pay back a prorated portion of your premium if you cancel the ROP term insurance before the end of the term. Also, the premium returned generally is not considered ordinary income, so you won’t have to pay income taxes on the money you receive from the insurance company. This might also be a great option for businesses that need to have a term policy for a key employee.  (Please consult your tax adviser.)

Within the last decade or less, some companies are adding ROP to their non-cash value building permanent universal life products.  The difference with this product is that they offer a return of premium (ROP) at specific years of the policies (generally 20-25 years into the policy)  and the policy must be surrendered at that time.  This gives the client more flexibility with their life insurance needs at various times of their life with the option of keeping the policy for a lifetime or surrendering for their return of premiums.   Again, being that this is considered a return of the premium that was put into it, so you won’t be taxed on the return of premium portion that is returned.  (Please consult your tax adviser.)

Another next generation ROP product is a product that is a whole life product, with a long term care rider, that provides a death benefit upon death, an immediate long term care benefit upon satisfying a long term care event, and a return of premium if financial burdens cause a need for the money that was put in.  This replaces the use it or lose it philosophy.  These products have been extremely popular in the last decade.

Some particulars

Unlike permanent cash value life insurance, ROP premiums generally do not earn interest or appreciate in value. Also, the premium returned usually does not include the return of added premium charges for substandard coverage (extra premium charged for poor health) or costs for certain policy riders (extra premium you pay for benefits added to the basic term policy, such as a disability rider).

With term ROP, the cost of ROP can be significantly greater than straight term insurance, depending on the issuer, age of the insured, amount of coverage (death benefit), and length of the term. But ROP almost always costs less than permanent life insurance with the same death benefit.

You may want to think about the amount of coverage you need, the amount of money you can afford to spend, and the length of time you need the coverage to continue.  Ask your insurance professional to provide several options to choose from and help you make the right decision.

Do you have questions about life insurance? We’re here to help! Contact Deb Marino at dmarino@smcofinancial.com or call us at 440-449-6800.

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