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Is Return Of Premium The Right Choice For
Your Client
When it comes to life
insurance most financial advisers suggest "buying term and investing the
rest." Their view is that clients who needed life insurance could often
do better if they bought inexpensive term policies, ignored the more
expensive cash value plans and invested the difference in premiums
separately. But now, a relatively new
product has some pros telling their clients to invest in a new kind of
term insurance.
This product, called
return of premium, allows consumers to buy fixed term life insurance for
10, 20 or 30 years, pay higher than normal premiums, and then get all of
their premiums back if they outlive the policy, as most will. Most
policies offer an early pay out option, and some even offer a loan
option. It's priced attractively enough that some financial planners
find it's a better deal for some of their clients than municipal bonds.
After careful review, many feel that term life insurance with complete
return of premium is an excellent value.
Here's why: The
insurance industry, which sees return of premium riders as a great
marketing tool for selling term policies, is pricing the riders so
that they actually earn a reasonably high rate of return if a
client hangs on to the policy for its entire term. Independent analysis
of some plans has determined that young healthy clients can earn
about 7 percent, tax free, on the extra premium that they pay for a 30
year policy.
Here's an example:
A 25 year old healthy male could get a $1 million 30 year level term
insurance policy for $770 per year, but he could also get it with a
return of premium rider for $1,095 per year. The difference of $325 is
the investment. At the end of 30 years, he gets back the total premium
of $32,850. That amounts to an almost 7 percent return on the extra $325
that was paid annually. That return is not taxable because it's treated
as a refund of premiums.
That's better than
you would do on most comparable investments. Even the 20 year plans
would return more than 5 percent to clients.
Such a 20 year plan, purchased by the same 25 year old male, would
provide an affordable and efficient college savings plan.
In almost every case,
the return of premium term plans were a better investment than
comparable whole life policies or municipal bonds. While an efficiently
designed universal life policy made be a better overall insurance value,
the smaller “out of pocket” cost of a return of premium product makes it
more affordable for most consumers.
That doesn't mean
everyone should jump at these plans. Life insurance is priced
individually; what's good for one person may not be best for another,
and there are other investments to consider before it makes sense to
overpay for term life, just to be able to reclaim those premiums in two
or three decades.
Of course, the projected
return is only realized if the policy holder keeps the policy for
the entire term. This has always been the issue with whole, and is why
universal life may be a better value for policy holders that have doubts
about whether they will complete the term of years.
Here are some tips for
approaching return of premium policies:
- Start by considering
your prospect’s life insurance needs. This only makes sense if they
need the coverage (such as mortgage protection or other family needs)
and are young, healthy and well heeled enough to afford a good term
policy that really will protect their family if they die.
How much is that? Many
well respected analysts, financial planners, investment advisers and
CPAs suggest you calculate how much annual income your prospect’s family
would need without a paycheck, and multiply that figure by 25.
How the Return of
Premium Option works:
- Purchase a 10, 20, or
30 level term and choose the Return of Premium Option for an
additional premium.
- The policy holder
pays guaranteed level premiums for the term selected, which provides
death benefit protection. As with any term policy, if you die while
the policy is in effect, the death benefit is paid to your
beneficiaries, income tax free.
- If you are living at
the end of the policy's level premium term, you are guaranteed to
receive a refund of all eligible premiums paid for both the base
policy and the Return of Premium Option income tax free.
For example: a male
client, aged 45, purchases a 20 year term policy with a death benefit of
$1 million, along with the Return of Premium Option rider. Annually, the
client will pay $1,645.00 for the term insurance and $1,760.00 for the
Return of Premium Option, for a total premium of $3,405.00. At the end
of 20 years, the client is eligible to receive $68,100, income tax free
(20 x $3,405.00.)(a), offering a rate of return of 5.93%.
Life insurance, like
other financial vehicles, is a tool and, like any tool, it will only
produce the desired results when it is used properly. The consumer
seeking the best return for their money will purchase the right tool for
the right job (need).
For advanced level
training in presenting and closing cases, visit
www.lifeLeads.net.
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June 2007 |
