Life insurance is just that, insurance on your life. You pay your policy (usually for 10 to 30 years) and if you die during this period, your beneficiaries will receive a payment from the insurance company. In a traditional term life policy, if you outlive your policy, you do not receive anything. For many, this can feel like a rip off after paying for so long, but fortunately there’s also the option of getting return of premium (ROP) life insurance.
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Why You Might Want ROP Life Insurance
The notion of ROP is simple – you pay your policy, you live past the end of the policy and you get all your money back.
On the surface, this seems like a pretty good deal, especially if you are young and in good health. Those of us who take pretty good care of ourselves may see this type of life insurance as a bonus.
Of course we would want to get our money back should we outlive the policy. And if we didn’t outlive the policy, money would still be paid to our benefactors just as with traditional term life insurance. However, there are some drawbacks to consider when thinking of ROP life insurance.
The Added Cost of ROP Policies
For one, ROP life insurance tends to cost approximately 30% more than traditional life insurance. This occurs for a few different reasons.
Not as many insurance companies offer ROP and there are fewer customers. So in order to make it worthwhile, return of premium life insurance companies have to charge higher premiums. Also, since the purpose of ROP is to pay customers who outlive their policies back, insurance companies use a portion of your premium to invest in order to pay you back at the end of the policy.
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Speak with any financial adviser about options for investing and types of life insurance and you will likely hear to term opportunity cost. It’s basically a look at how much you are giving up to go with one investment over another.
When it comes to ROP, you will be paying more for this type of life insurance over a traditional policy, which means you’ll have less money to spend or invest in something else. Furthermore, you only get back the premium, so you lose any additional returns you could have made had you invested your money elsewhere.
Given the issues listed above, there are a number of financial advisers who are against buying ROP and recommend traditional life insurance. Ultimately you’ll have to make the decision that’s right for you, so it’s a good idea to do your own research and read reviews from return of premium life insurance policyholders. Knowing all the pros and cons of getting return of premium life insurance can help you determine if it’s worth it.
If you are someone who might feel cheated after paying for traditional life insurance and getting nothing in return, ROP may be for you. However, if you’d rather invest the extra money you would have paid in a retirement account, it probably makes more sense to go that route.
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