Life insurance with return of premium?

omgladypirate · September 2015

I talked to an insurance agent today about getting term life insurance (I am 31, expecting my first child, no health issues) and they gave me the option of regular term or term with return of premium, which is twice as much per month. I had no idea such a plan existed. Any thoughts/experience with this? I can afford the higher cost, so it does sound appealing to get my money back when the policy is up.

CuriousKiddosMama · September 2015

When do you get the return of premium? I guess I need more information on this plan. I would bet that you are going to be better off going with standard term insurance because the rate of return on whole life insurance is horrible, so I would bet this will be too.

als1982 · September 2015

How long is the term? I'm guessing if instead of paying the extra on the term with return of premium, you instead invested that same amount over 20-30 years you'd end up with the same or more.

simplyelise · September 2015

If you add up the regular premium amount over the years of the term, you're probably spending around $5000 total over the term. Would you rather spend $10,000 just so you get that money back?

I think you would have a good chance of turning the $5000 (what you save by going with the regular term) into more than a 10k return if you put it in the market for the 20 or 30 years of the term.

omgladypirate · September 2015

30 year term, 100% return at the end.

I didn't really think about just investing the same amount. However, this might be easier and more of a guarantee? I need to look into it more, but was wondering if anyone had any strong feelings about it one way or the other.

hoffse · September 2015

omgladypirate said:

30 year term, 100% return at the end. I didn't really think about just investing the same amount. However, this might be easier and more of a guarantee? I need to look into it more, but was wondering if anyone had any strong feelings about it one way or the other.

If you're getting all of the money back at the end without interest, you're not making anything, so there is no return. You are essentially giving the life insurance company an interest-free loan. In fact, because of the rate of inflation you would be losing around 1.5-2% of purchasing power per year while that money is in their hands.

@SimplyElise is correct that you would do way better investing it in something, even if it's a low-return, very safe investment like bonds. Personally, I would be inclined to invest in the market more aggressively. Even with the crazy fluctuations we've had recently, over 30 years you are very likely to end up in a much better spot than where you started.

Under this plan, you are paying them $5K more to get your money back at the end, but it will be declining in value while they are holding onto it. So it does cost you something.

@Brij knows a lot about insurance, and she can probably tell you more.

brij2006 · September 2015

What they're pretty much talking about is some sort of a hybrid whole life insurance policy. Whole life insurance has gotten a bad rep lately because the returns are only 2-4%, and your money can do better in the market. The average person is now getting wiser and realizing it's a crap product, so a lot of agents and companies are now calling them something different to try and sell it.

So really, the product is crap. Pay the cheaper premium on the 30 year term and don't worry about getting your money back if you don't pass away. You're better off taking that extra premium they want to charge, and putting it into a mutual fund and watch it grow. Bet after 30 years you would receive more than $10k back.

Also, it isn't more of a guarantee. Yes, it's a safe investment that they usually put it in, which is why the return is so low. But I've seen some really crappy whole life policies that people rely on to retire. It's sad, but a guarantee doesn't necessarily mean it's the best thing to do with your money.

vlagrl29 · September 2015

A normal term policy is so much cheaper - forget the whole policies.

short+sassy · September 2015

Sorry to hijack the thread a bit. I've been shopping for life insurance for my H and am absolutely stunned at the difference between a smoker vs. non-smoker in rates.

$100K 20-year term -- non-smoker, $20/month first five years, $25/month years 6-20

Same policy -- smoker, $99/month first five years, $120/month years 6-20

Unfortunately, he is a smoker. FIVE times as much! Argh! I showed him the rates and gave him a very "not so subtle" hint he needs to stop smoking.

omgladypirate · September 2015

Thanks guys!

bmo88 · September 2015

short+sassy: Yikes, that is a huge difference. So not only is he spending more on cigarettes, but the insurance costs are crazy. That's a good reason to kick the habit (plus the health benefits).

omgladypirate: OP, I would recommend sticking with a standard term life insurance plan. I looked into return of premium plans and like PPs said, they aren't really worth it. I just signed up for Banner Life insurance and here is my info:

27 year old female, premier health category (highest) and no history of problems, healthy weight, non-smoking
30 year term
$500,000 policy value
Monthly premium: $26.75 (or $9,630 over the term)

That is quite a bit better than the previous policy I had with Fidelity life which had all the same info/value, but cost me $36.50 a month (or $13,140 over the term). DH's monthly premium also went down by $9 per month by switching. So we are saving $6,900 over the next 30 years.

So I would suggest shopping around a bit or using a company that will compare multiple quotes/offers for you. It's crazy how much a small monthly amount can add up over the life of the term!

short+sassy · September 2015

@brno88, I agree! I knew it would be a difference, I just didn't realize how much. He's at least not a heavy smoker...but yeah. He still probably goes through 2 packs/week. Which is roughly $40/month. And, from a life insurance perspective, it doesn't matter if a person smokes one cigarette/day or 50. They are still in the smoker category.

At least with the company I looked at, he'd also had to have not had a cigarette for at least one year before he can start to move up into better categories. It takes no cigarettes for five years to get a smoker back to a non-smoker category.

brij2006 · September 2015

Oh, as far as where to look. Google "Independent insurance agents" in your area. Call them up and have them run you some term quotes.

That's part of what I do at our agency, and it takes me 5 minutes to run some numbers with 27 different companies.

You're able to see what company is going to give you the best rate, right away.

Life insurance with return of premium?

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