Return of premium term policy...what do you think?

[Vottomatic]

So a buddy of mine sells insurance for a living. It's never really come up, and he's never really pushed anything on me in the past. But last week, I let it slip that I was looking for a 20-year, $500,000 term policy for my wife, who stays at home (to cover fewer hours worked, needed childcare, etc). He wanted to set up a lunch to talk to me about it, so I figured why not, I'll take a free lunch. I kind of expected him to try to sell some whole life policies (which he did a little, but didn't push them too hard; I think he could tell I had absolutely zero interest in them), but he surprised me and came with mostly term policies.

One of them had a return of premium rider, which I was not familiar with. As he explained it (and from what my research afterward also showed), you pay a higher premium (on some of the policies, as much as 3-4x more), but at the end of the term, you get all the premium payments back as a tax free lump sum.

Am I missing any catches here? I'm sure this isn't as good as a "normal" term policy, which costs significantly less, but I must admit it is somewhat intriguing the idea of getting back like $40,000 or whatever it is after 20 years, essentially making it so the policy cost nothing out of pocket. And yes, I know that you still give up the opportunity cost of investing the money left over from lower payments, and that the money won't be worth as much in 20 years due to inflation alone, but still. Set me straight guys, and talk me out of making what I'm assuming is a mistake!

[jfoxcpacfp]

Of course, it would be tax-free because you do not get any tax benefits from your premium payments. But it sounds lIke a pretty cool benefit when the agent puts it that way.

In essence, he is offering to invest your money (the additional premium) at practically zero % for 20 years with no guarantee that you will receive your "principal" back. If you die during the term, you don't get any of your "investment" back. If you don't die, your "real" return is the original premium you would have been paying for the plain vanilla policy for those 20 years, iow, the difference between the low premium and the inflated premium. The lower the differential, the higher the return %.

At least, that's the way I see it.

[VagabondMD]

He wanted to set up a lunch to talk to me about it, so I figured why not, I’ll take a free lunch. 

Warning! There is no free lunch (especially from an insurance agent).

I'm sure this isn’t as good as a “normal” term policy...

You are correct. It sounds like a bad deal but carefully worded to sound like a good deal. That's how these insurance salesmen operate. Send him the $20 (or whatever) to pay for your lunch and walk away.

Rule of thumb: If someone offers to buy you lunch and sell you a product, they are getting the better of the deal, not you.

[ITEngineer]

People whom sell insurance are interesting.....(so are MLM...but that's a different topic)

Lets pretend we're buds and you're looking to redo your office IT infrastructure. We chat about it over a free lunch with the intention that you might have me sell you IT services for your practice's office.

I would not come back to you and propose everyone get Alienware Computers for their personal desktop and recommend you purchase physical servers and put them in a datacenter and start hiring a full time IT staff. (whole life insurance)

I would not recommend you to a buddy who hosts computers in the basement of his mom's house....(return of premium policy)

I would come up with the most reasonable solution for your needs using proven off-the-shelf cloud services. They would be reasonably priced. It would make sense given your needs. (Term! Term! Three cheers for Term!) They would allow you to cross shop (Office365 or Gmail? Dropbox or Google Drive) at similar price points and features.

Remember the policy does not even adjust to cover the cost of inflation. Using this handy inflation calculator $40k today gave you the purchasing power of $26k back in 1997. If inflation somehow became rampant....this becomes easy to repay!

I would keep your investments and insurance separate. Buy the policy at a reasonable rate, pay it annually and forget about it. Hopefully you'll never have to use it.

[Jason Veirs]

OSUDent wrote:

So a buddy of mine sells insurance for a living. It’s never really come up, and he’s never really pushed anything on me in the past. But last week, I let it slip that I was looking for a 20-year, $500,000 term policy for my wife, who stays at home (to cover fewer hours worked, needed childcare, etc). He wanted to set up a lunch to talk to me about it, so I figured why not, I’ll take a free lunch. I kind of expected him to try to sell some whole life policies (which he did a little, but didn’t push them too hard; I think he could tell I had absolutely zero interest in them), but he surprised me and came with mostly term policies.

One of them had a return of premium rider, which I was not familiar with. As he explained it (and from what my research afterward also showed), you pay a higher premium (on some of the policies, as much as 3-4x more), but at the end of the term, you get all the premium payments back as a tax free lump sum.

Am I missing any catches here? I’m sure this isn’t as good as a “normal” term policy, which costs significantly less, but I must admit it is somewhat intriguing the idea of getting back like $40,000 or whatever it is after 20 years, essentially making it so the policy cost nothing out of pocket. And yes, I know that you still give up the opportunity cost of investing the money left over from lower payments, and that the money won’t be worth as much in 20 years due to inflation alone, but still. Set me straight guys, and talk me out of making what I’m assuming is a mistake!

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Hi OSUDent - I am an insurance broker who specifically deals with Life/Disability/Long-Term Care and Health Insurance. These are the only lines of insurance that we focus on.

To be quite honest, these ROP Term policies have a lot of sizzle, but there's usually little steak. As others have mentioned, they do have their downsides, which I have outlined below. As you may already know, and in full disclosure, agents/brokers financially benefit with higher commissions when selling these ROP Term policies (due to their cost being higher), therefore, it would benefit me or any other broker to try to sell you an ROP Term over a straight Term, but I typically never recommend them to clients. Of course, if a client finds the "forced savings" aspect appealing and is not diligent with investing, then I will give them whatever they're looking for, but I will also mention the following information below, as I think these ROP Term policies have a couple of "gotchas" so-to-speak. There are also only a few carriers who offer these ROP Term policies. As far as I know, the only carriers who offer ROP Term today are AAA, American General, Prudential, Cincinnati Life, Columbus Life, and Assurity (SEE ATTACHED RATES BELOW). If you're in OH, then your friend may be with Cincinnati or Columbus Life.

The downsides that I always mention to clients, are that the ROP Term policies are not only about 2-4+ times more expensive than a straight Term policy, you also don't get any interest on the ROP that you receive back after 15-30 years. Essentially, you're just getting a return of your basis, without any interest, in which, the opportunity cost of not investing the difference of what you would've paid for the straight Term policy comes into play. Make no mistake, the insurance carrier is basically investing the funds and reaping the investment benefit on the extra amount of premium that you're paying for the ROP Term policy, in order to allow them to give you all of your money back at the end of the term period.

In addition, ROP Term Cash Surrender Values are usually calculated on a sliding scale, meaning, if your needs were to change and you were to cancel the policy prematurely (before the end of the term period), you would only get a small percentage of your money returned to you. This percentage usually increases every year like a traditional vesting concept, eventually maxing out to 100% at the end of the term period. Trust me, this is a conversation that I've previously had with clients post 2008, where they have fallen on hard financial times and called us looking to cancel their ROP Term policies in order to access the cash, only to find out that they only have a portion of the Cash Surrender Value available to them within the policy.

With a straight Term policy, you can replace and cancel the policy at any time, without leaving much on the table. We routinely do this with straight Term policies, where a client's health has improved and we're able to lock them into a better rate with another carrier, due to this improvement in health. It's a very easy transition, and there's nothing left on the table. I'm actually working with a client now who has a 30yr ROP Term that he took out many years ago when he was smoking cigarettes. He was rated as a Standard TOBACCO on that policy and is now tobacco-free. The problem is, although we could get him a lower-priced straight Term policy today, if he were to surrender his existing ROP Term policy today, he'd only get back roughly $7k of the nearly $57k (12%) that he's paid over the past 14yrs or so. At the end of the 30yr ROP Term, he will get back almost $122k, therefore, he would be leaving a lot of money on the table. He is also now 14yrs older, so the cost for a new ROP Term policy today would be much more than the roughly $340/mo that he's paying for his current ROP Term. We priced everything out and he's basically better off just staying the course with that policy.

Lastly, although VERY RARELY utilized, the Conversion Options with these ROP Term policies are also limited. I've had a FEW situations where a client has an existing ROP Term policy that is terming out in 5yrs or so, and due to a major change in health they cannot medically re-qualify for a new Term policy. Despite not being able to re-qualify for a new policy, they still need coverage, therefore, they're relegated to the Conversion Option within their existing ROP Term policy, as they have no other option, outside of Guaranteed Issue coverage, which is much more expensive and usually only issued at much smaller face amounts. Since the existing Conversion Option is MUCH more expensive, the client usually has to do a partial conversion in order to keep the premiums affordable, where they convert a portion of their existing policy, but also keep the remaining portion in Term until the policy is set to expire/increase. When doing a conversion with a straight Term policy, it's usually not a problem with keeping the remaining portion in Term until the policy terms out, so long as it meets the minimum face amount with that particular carrier, but with ROP Term, you usually have to just let the remaining partial Term coverage go, as the carrier will not allow you to keep it. Although the Conversion Option is much more expensive than their existing Term policy and not regularly utilized, this is something to consider.

Please see the attached .PDF below in order to see an exact Term vs. ROP Term Comparison that I quoted for a 35yr old male. These rates are based on an annual payment mode for a 35yr old male, $500k face amount, assuming the best Preferred Plus Non-Tobacco health class. I have also included the actual DropBox link here - https://www.dropbox.com/s/sw7odret53c6b4r/White%20Coat%20Investor%20-%20Term%20vs.%20ROP%20Term.pdf?dl=0

[Jason Veirs]

I completely agree and although I always mention this to my clients and give them my 2 cents, I always let them make the final decision. I just present both sides and then let them come to whatever they think is best for them.

I've actually had instances where I lay everything out for them and show them all of the actual numbers and "gotchas", yet they insist on going with the ROP Term. As I said, I'm not a huge fan of them at all, but the client is the one who's always in the drivers seat.

[Vottomatic]

Thanks for setting me straight guys. I knew he would make a bigger commission on the more expensive policy, it just wasn't a product I was really familiar with. I'll stick with the straight term, and possibly not from him - I thought even the straight term premiums were pretty high!

This is why I should keep my mouth shut about these things around friends...I'm sure he won't be happy if I don't get anything from him, but oh well. I'm certainly not going to let myself get ripped off just because I know the guy.

Oh, and he talked so much that I was late for my first afternoon patient, and I hate being late. Another in the minus column for him.

[Jason Veirs]

That's too bad. As with anyone (friend or not), always shop around and compare their rates with the rates on www.Term4Sale.com, as that will give you an idea of the general cost, based on your age, face amount and term length that you're looking for.

To be honest, I never bring up life insurance with any friends or family unless they specifically ask, as no one wants to be pitched on life insurance when you're trying to just enjoy some free time with friends and family. Unfortunately, many agents at the captive mutual carriers are trained to sell to their "warm market" (friends and family), and before they know it end up like Ned Ryerson from Groundhog Day. Of course, with time, their "warm market" ends up being a very lukewarm-cold market. 

[jfoxcpacfp]

OSUDent wrote:

This is why I should keep my mouth shut about these things around friends…I’m sure he won’t be happy if I don’t get anything from him, but oh well. I’m certainly not going to let myself get ripped off just because I know the guy.

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A friend with an agenda is an acquaintance, not a real friend.

[roundtown98]

Do some research and check out articles written about specific life insurance. Everyone has a different perspective on return of premium. Term Life is like renting you have it for so long then move on. Return of premium gets some or all the rent money back but what did you pay for rent versus the difference in price of getting your money back. As one poster put on here do the math. If it makes sense then do it. If not run as fast as you can. If you want to read up on different life insurance a friend of mine has a website that  wrote articles on each type of life insurance. My friend was even quoted in the Investor Daily, so that should give some credibility. Here is the website just to check out the articles.

www.bestquoteinc.com

[The White Coat Investor]

Return of premium is mostly a gimmick- you pay extra for the policy and you get back your premiums at the end, but without any earnings or inflation adjustment.

https://www.whitecoatinvestor.com/return-of-premium-term-life-insurance-friday-qa-series/

I was wondering why nobody had linked to that post yet. Then I realized I wrote it five years ago and most of you have never seen it!

[Jason Veirs]

I completely agree. I never recommend ROP policies to clients, per all of my reasons noted in my post above and I can't stand the buy vs. rent jargon that many agents peddle - Such a joke, and unfortunately, the result of many previous captive agent training seminars.

I also think that most WCI readers are much more financially savvy when it comes to investing, and that they understand the time value of money and the opportunity cost of the insurance carrier giving you your money back at the end of the term, without any accrued interest. I always mention this argument to clients, but some of them still insist that they like the "forced savings" element of an ROP policy. It doesn't make any sense to me, but to each his/her own.

In fact, I will even specifically tell clients that I am commission-based, and that I would make more money by selling an ROP term policy to them, yet I can't recommend them in good conscience, due to all of my reasons noted above. Although frustrating, I give them the pros and cons and then let them decide.