June 28, 2008

Return of premium term life insurance - Is it a good deal?

Return of Premium term life insurance is a form of term life insurance that promises to pay you back the premiums at the end of the term. This sounds almost too good to be true as if you're getting the insurance for free. Say you sign up for a 20 year return of premium term policy and pay $50 a month for the policy the whole 20 years. Then at the end of 20 years (assuming you didn't die) you'd be paid the $50 x 12 months x 20 years = $12,000.

Like most things that seem too good to be true there is often a catch. In this case the catch is basically just that return of premium policies have a higher fee than a standard term policy and while you're paying the insurance company premiums for years they are making interest on your money.

For sake of comparison, I got a quote on a term policy for 20 years. The standard term rate was $32 a month and the return of premium rate was $72 per month. That's a $40 difference per month or $480 per year. Lets compare the 2 options:

Standard term insurance: You pay $32 a month and get term insurance for 20 years. You take another $40 and put it in the bank at 6% interest. At the end of 20 years you would have $17,657 in the bank.

Return of premium term insurance: You pay $72 a month for your policy. At the end of 20 years the insurance company refunds $72 x 12 x 20 = $17,280

If you can make 6% or better on your investment then you would come out ahead with the standard term policy. Plus you would also have ready access to your money.

It appears to me that a return of premium term life insurance is not a good idea. Generally if something seems to good to be true then it probably is.

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