Term Life Insurance - Return of Premium Option
There has been a recent fad with insurance companies offering return of premium option.
So, is this option good for you, the consumer, or is it just another way for companies to make money?
The answer is simple. The return of premium options are NOT a good deal and you should not purchase them if you wish to maximize your money.
Here's why they are not a good deal.
How It Works...
When offering a return of premium rider on a term life insurance policy the insurance company will charge you a higher premium for this feature.
They claim this is a great deal because if you don't die within the term of the life insurance they will refund your money to you.
Sounds good on the surface, right? Think again, if you thought this was good.
When you choose the return of premium rider, the insurance company charges a higher premium then takes this money and invests it and gives it back to you at the end of the term.
The problem is that if you were to take the term option without the return of premium feature, then take the cost savings and invest it yourself, you would come out with more money than what the company will give you back at the end of your term.
Additionally, if you cancel these policies rather than keeping them for the full term you may only get a small portion, if any, of the premiums you have paid refunded to you.
Had you taken this money and invested it yourself on the side, you of course would have access to that money regardless of the status on your life insurance.
If you think you will keep the term life insurance the full term you, are probably mistaken. As we live longer (meaning mortality tables are increasing) term life insurance rates drop. Therefore there is a good chance, even though you are older, that you will replace your current term life policy some years down the road.
The bottom line is that return of premium options are generally good for the insurance company's pocketbook, not the consumer's.
Obviously you are assuming on the return of premium products that the person WILL invest the difference and in most cases have to earn over 5% interested guaranteed. Let's look at the mutual funds the last few years. It is not an investment, but a guaranteed way to get all your money back. Also so far as lower rates years later. You also are an idiot, for rates get more expensive the older you get, AND you must be insurable to get them. Also mortality rates going down are NOT a guaranted thing, you are assuming people will live longer.