Monday, September 10, 2007

ROP Term Insurance

As I thought the life insurance industry can't screw people up more than they already have with the cash value life insurance, a new type of term insurance called Return of Premium (ROP) Term Insurance been showing up these days.

ROP Term Insurance is nothing more than screwed up version of whole life insurance. While its less expensive than Whole Life insurance, its more expensive than term insurance. If you don't know this fact, whole life insurance builds cash value which you can borrow at anytime (don't that sound awesome to borrow your own money?). In ROP Term Insurance, it doesn't build cash value. Instead, the insurance company takes the extra money and invest it into their own accounts. You maybe able to borrow the money, but that will cost you more money. At the end of the term, they will return all premiums back to you and keep the gains for themselves.

Does that mean this type of life insurance is free? Absolutely not. Take a look at this example:

Lets say you are in perfect health and you are 30 year old. You purchase a 30 year term policy with $500,000 coverage. With a level term policy, it will cost you around $45/month. With ROP Term policy, it will cost you around $80/month. The insurance company will invest the difference of $35/month in their own account. At a 12% rate of return, they will accumulate about $124,000 in 30 years. The total amount you paid in for those 30 years is $16,200. How excited are you to get back the $16,200 you paid for while the insurance company made a profit of $107,800?

As you can see, insurance is never free. The cost of you buying a ROP term policy in that example is $107,800. You could of made $124,000 in your own investment account. How excited are you about getting a 0% return on your money?

What if you die during the term? If you died during the term, then you have overpaid your premiums. No one knows when they are going to die, which makes ROP term insurance more costly to the consumer. Most people think they will live well beyond the 20 year or 30 year term, but anything can happen. Are you willing to take that bet by paying more on ROP term insurance than a regular term insurance? I wouldn't. I would rather get more coverage and pay less money on a regular term insurance than to get ROP term insurance. At least I know I won't be overpaying my premiums if I die. I would also invest my own money somewhere else than to bundle them together with life insurance. If I live beyond the term, I would have a nice nest egg built up.

In closing, no matter what crazy idea that the life insurance industry may come up with, traditional level term policies are always the best type of life insurance for the consumer. Its inexpensive and it enables you to put your savings where ever you want such as CDs, money markets, mutual funds, IRAs, 401(k), etc.


-The shorter the term on ROP term insurance, the more costly it is. A 20 year ROP term will cost 3 to 5 times more than 30 year ROP term because there is less time for the additional funds to grow (the additional funds is the difference between ROP term insurance and the regular term insurance).

-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.