97% of People Outlive Term Life Insurance Policies, so there’s a very small chance that your term life insurance policy will ever be used. In other words, there’s a 97% chance that you are throwing money down the toilet. Sure, you get the peace of mind, but wouldn’t it be great to get that peace of mind, and not throw away money? As far as money going down the drain, this is the case with most insurance types. For instance, car accidents happen, but they certainly aren’t all that common. How many car accidents have you been in or seen over the course of your life? Not very many, if at all. So the million dollar question is, wouldn’t it be great to get your money back just in case you didn’t use the insurance? With the return of premium rider attached to your term life insurance plan, you can.
What is Return of Premium Term Life Insurance?
Return of Premium Term is term life insurance with a return of premium rider. With this rider attached to the policy, you get a return of all of your monthly premiums if(when) you outlive your term policy. That term is usually 20 or 30 years. 30-year ROP term is a better deal than 20 year, because it’s not much more expensive than regular term at the period length. Both are better deals than just giving your money to the insurance company.
What’s the catch?
The only real catch is that ROP Term is slightly more expensive than regular term. A typical 30 year-old can expect to pay $28/mo for regular term and $45/mo for ROP Term.
What about inflation?
Inflation grows at a rate of 1.5-3% every year. So in about 30 years, your dollar will be worth approximately half of what it is today. That also means that your premiums get comparatively cheaper as the years go on. Overall, inflation isn’t a big factor for you.
Is there an opportunity cost?
Many investment minded people think that it is better to buy regular term, and use the extra dollars you saved from buying less insurance, and investing it for a better return. The likelihood of this approach returning more money is very slim, even if the portfolio averages 8% returns yearly. Not to mention there is a great chance that most people won’t invest the difference. There’s also the chance that the market can crash right around the time you need the money. Lastly, there is great potential for tax liability with investments, depending on the route you choose.
For curiosity’s sake, I ran the numbers to see what approach would return more money, BTID, or ROP Term. The results are astounding. With an ROP rider, paying $45 a month, will return around $17,000 after 30 years ($568/yr premium x 30). If we instead pay $28/mo, and invest the difference of $17/mo or $204 a year, with an average 8% yearly return (optimistic), and after we factor in money lost to regular term (362.79/yr), we get $14k, all before taxes. In other words, $24,959 ($204 invested x 30 years with 8% yearly yld) minus $10,882 ($362.79 yearly regular term premium for 30 yrs) = $14,077 total return for the buy term, invest difference group. Again, the ROP Group made $17k. There’s a clear winner here, even before we get into the drawbacks of investing.
The Average stock and bond portfolio will return between 5% and 8% for the next 30 years.
The 8% return for the example investment I used is the best case scenario. If your portfolio performs lower than that, and in likelihood it will, you will have really missed out on a lot of money not going the ROP Term route. That’s assuming you even stick with the investment, no offense, it’s just human nature that stats back.
ROP Term is tax free. It is likely you’ll pay taxes for the investment stock growth. ROP Term is risk free, meanwhile, you could lose everything in the stock market. This is all assuming that the average person will invest the difference, but there’s evidence showing that is unlikely to happen.
Worst Case Scenario Going The BTID Route
If your investments are taxable, you’re going to need a portfolio return in excess of 9.4%, which is a lot higher than the average, to outperform the ROP Term. Worst Case Scenario, the market crashes, or you end up not sticking to your investment, and overall, you lose money to the insurance company. Oh, but you’ve got that peace of mind though, right? The ROP-termer has that, and their money too.
Best Case Scenario With ROP Term
ROP Term is going to pay you back every singly monthly premium you paid over the course of your policy. There is no opportunity cost. There is no alternative where you come out with more money. Do you really think the stock market is the answer? Again, the future doesn’t look to bright for stocks and bonds.
Who should buy ROP Term.
In a perfect world, everyone should buy it. However, we live in a world where money doesn’t grow on trees. People have bills and tightly structured budgets that doesn’t allow for many expenditures. In that case, go with regular term. If you can afford the extra expense, go with ROP term. You really have nothing to lose, and everything to gain.
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