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Return of Premium Life Insurance

by David Frucella

Whole Life is the product the life insurance industry's profit is built around. The current variation of Whole Life is Universal Life and Variable Life. Please see my comments on Universal Life and Variable Life at (Universal Life Insurance - The Good The Bad And The Ugly).

Return of Premium contracts are a variation of the Whole Life principle. You pay a set premium (usually about three times the regular premium). If you live beyond the term period, you get all your money back. Good deal? Let's look at the numbers.

Take a 40-year old male seeking $500,000 of coverage for 20 years. At the best rates, the premium is currently about $350 per year (as of 6/28/07). If he lives the 20 years, he has had insurance for those 20 years and gets nothing back. If he buys a 20 year return of premium contract, his premium is about $1,075. If he lives out the 20 years, he has 20 years of coverage and gets all of his premium back or $21,500. Has he made a good decision?

By taking the difference of $720 per year and investing it, he would only have to have an after-tax yield 3.68% each year to equal the same amount of money over 20 years. Most could do better than that.

If you want to save money, I usually recommend buying less expensive term life insurance and putting your "investing" dollars in to your retirement plan (401K, IRA or 403B). This is especially important if your company matches any of your contributions.

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Next: Page 13 - Re-Entry or Re-Qualification - Can It Help You Or Hurt You?

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