Q: Is Return of Premium (ROP) term life insurance a good deal?
A: Sometimes. Depends. Only time will tell.
I’m not trying to be cute with the ambiguity here. But truth be told, this is not simply a ‘yes’ or ‘no’ question. It’s slightly more involved than that. Let’s take a look at each response.
- Sometimes – ROP term life insurance is a good option for some people, but not everyone. To say that one is better than the other in all cases is just inaccurate. Who is it good for? Well, that depends.
- Depends – There are three primary factors that determine whether ROP term or regular term is the best fit for you.
- The actual rate of return the life insurance company is offering on your policy. Remember, ROP term is simply a life insurance policy that pays you back all the premiums you paid in (or a portion if the policy is terminated early) if you do not goes toes up and there is no death benefit paid. In that sense, it’s like an investment, with the investment amount being the premium difference between ROP term and regular term. Therefore, each policy has an associated rate of return
- The second factor is the likelihood that you can achieve a comparable or better rate of return by investing the premium difference on your own.
- The third factor, and the one that most often trips up policy owners, is the likelihood you will stick to an investment plan and invest the premium difference for the duration of the policy.
- Only Time will Tell – Investment returns fluctuate over time. You really won’t know your investment return on the regular term/invest the difference yourself option until the end of the policy term. It’s somewhat of a leap-of-faith. But you will know up front what the investment return on the ROP term policy will be because the premiums will be guaranteed to remain level and the amount you will receive back will not change.
You may be surprised to see that price differential is not a primary factor in determining whether ROP term is a good deal. However, it is important to consider whether you can afford the higher premiums of the ROP term policy.
For sample comparisons and help determining rates of return on various policies, try our Return of Premium Term Life Insurance Calculator.