NEW YORK (MONEY Magazine) -
The pitch: Pay 30 to 50 percent more for term life insurance, and 20 or 30 years later you'll get a check back for every dime you spent.
Sounds like a no-lose deal, right? If you chafe at the thought of paying premiums for decades with nothing to show for it except a pile of check stubs, it's easy to understand the appeal of this new kind of policy, known as return of premium (ROP) term life.
"You aren't supposed to think of insurance as a waste of money, but inevitably you do," says Byron Udell, CEO of insurance Web site AccuQuote, who reports that ROP is a hot life insurance product now. "Getting your money back just has an emotional appeal."
Emotions aside, does an ROP policy make financial sense?
The policy pays you back... A 30-year-old man in good health could pay $930 a year for a 30-year ROP policy today vs. $630 for plain-vanilla term life insurance with the same $500,000 death benefit, according to AccuQuote.
At the end of 30 years, he'd get a check for $27,900, which equals the total premiums paid.
In essence, he's paying $630 for insurance and investing the other $300 with the life insurance company for a guaranteed return.
But you'll likely drop the policy early... Most consumers don't stick with term policies for the entire term, and often for good reason, such as a chance to lower their rate.
|Amount returned after 30 years†||$0†||$27,900†|
"People get divorced or remarried, or something new and hot comes along," says Peter Katt, an insurance adviser in Mattawan, Mich.
"Insurance companies are counting on very few people getting to the end."
...which, on first glance, looks great. Investing $300 a year for 30 years and ending up with $27,900 is the equivalent of earning 6.5 percent a year -- not bad, especially if you consider that the "return" is guaranteed and tax-free (the IRS treats the money as a loan).
|30-year ROP policy†||6.5%†|
|20-year ROP policy†||3.1%†|
|60% stocks/40% bonds portfolio †||11.9%†|
|†Note:  Annualized return from Sept. 1, 1973 through Aug. 31, 2004.|
|†Sources: AccuQuote, Lipper and LIMRA International.|
The numbers are worse on shorter-term ROP policies -- just 3.1 percent a year on a $500,000 20-year policy.
Still, neither matches what a portfolio invested 60 percent in stocks and 40 percent in bonds would have returned over the past 30 years.
The bottom line
...and if you do, you lose. If you cancel early, you get back only a portion of your premium: usually nothing for the first six years, 9 percent after 10 years and 35 percent after 20 years.
Drop the 30-year policy after 20 years and you'll barely break even. With ROP insurance, you're essentially giving up the flexibility to drop or replace your policy -- which you might want to do if something better comes along.
Also, once you retire, you can go without life insurance, but if you lock in a multi-decade ROP policy, you won't want to give it up.
So skip the ROP, pay a lower premium and invest the difference.