Wednesday, April 20, 2005

Many Happy Returns...

It’s been said that the life insurance industry moves at the speed of, well, snails. And there’s some truth to this. But every once in a while a new product, or a substantive enhancement to an existing product, comes along. Such is the case with Return of Premium term life insurance.

A relatively recent development in the life insurance universe, RoP seeks to address one of the major disadvantages of term insurance: what happens at the end of the “term?”

To understand why this is important, let’s examine what term insurance does, and what it doesn’t do. Term life insurance is “pure protection;” that is, it pays a death benefit if/when you die during a specific time frame, or “term.” It’s analogous to renting or leasing your insurance. I’m not going to get into the whole term vs permanent debate here, let’s just leave it that term insurance can provide reasonably-priced coverage for a set amount of time.

One further note: term insurance premiums are generally “locked in” for that period, usually 10, 20 or even 30 years. So the insurer can’t raise your rates if your health declines. But eventually, the end of the term comes along, and one presumably hopes to still be drawing breath. And that’s where things get dicey.

Which brings us back to the question posed above: what happens at the end of the “term?” Well, the rate is no longer guaranteed at that lower level. And many folks decide they no longer need the coverage (again, I’ll defer discussion of whether or not this is wise). And the insured has naught but a bunch of cancelled checks to show for their efforts.

But what if your insurance guaranteed to return every penny you’ve paid in if you’re “still standing” at the end of the term? No matter what your health, no matter what the economy has been doing for lo those many years, you get back everything you paid. This is the premise, and the promise, of RoP. Think of it this way: what if, when you sold your house, you got back all the homeowners insurance premiums you’d paid in? That would be a deal worth considering.

Now, this “extra” doesn’t come cheap. The rate depends, of course on the face amount, but also on the length of the term. Believe it or not, though, the longer that term (30 years vs 10), the lower the extra cost of the rider. This begins to make sense when one considers that the carrier has the use of the money for a longer period of time.

RoP isn’t for everyone, or appropriate for every case. But if you’re looking at term coverage, and you think that you might just outlive it, take a look at RoP.
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