When it comes to protecting your family, getting the right type of life insurance policy is crucial to making this happen. There are different types of life insurance plans and knowing which one is right for your needs can be difficult. This is especially true if you are trying to protect your spouse and children from the financial difficulties that the unexpected passing of the breadwinner will bring.
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One of the most interesting policies is the return of premium term life insurance that people around the world use to protect their families from the unexpected passing of the policy holder. This is the type of policy that many people have invested in over the years and represents an option worth considering for those who want to diversify their portfolio.
What is Return of Premium Term Life Insurance?
Essentially, this is term life insurance that after a pre-set period of time which is usually 20 or 30 years, you can end the policy and get back all of your premium payments. This ensures that if you outlive the term of the policy itself, all the money that was invested will be returned to you. This will provide a much needed peace of mind that you do not have to start all over again with another term policy because you can use what has been built up over the years as a nest egg.
For example, if you were to take out a $1 million term life insurance return of premium policy and paid $10,000 annually for 30 years. At the end of that time you will be refunded $300,000. There are term life insurance with return of premium policies that also add in interest as well. Although the interest rates are usually not quite as high as they are with some other types of investments, what can be said is that the return of premium life insurance cash value does go up beyond the premium payments as time goes on thanks to the interest rates.
Return of Premium vs. Term Life Insurance:
Although similar in some ways, there are differences between term life insurance with return of premium policy over standard term life insurance. Understanding the differences will help you make the best choice between which of the policies that you want to choose for your needs.
Lower Rates for Term Life: Generally speaking, you will be paying lower premiums for standard term life insurance because there is no interest build-up or return of your premiums at the end of the term. For example, using sources from a singular insurance company a 37 year old male non-smoker taking out a $250,000 term policy will pay an average of $562 per year. However, adding the return of premium rider will up the cost to $880 per year which adds more than 50% to the cost of the premiums.
Tax-Free Policy: One concern that many have centers on the return of premium term life insurance tax that they believe occurs if the policy holder should pass away before the end of the term itself. However, those who receive the benefits due to the return of investment policy being paid are considered income-tax free as a result. However, depending on the size of the policy they may fall into estate taxes if they are large enough to be included.
Investment Potential: Because many return of premium policies generate an interest rate, you can use them as investments which can help diversify your accounts which will better protect you against the loss of one type of investment. Many investors use them as part of their overall investing strategy and when it comes time to receive the cash value they can re-invest the money if they so desire.
Borrowing: Policy holders can borrow against the return of premium term life insurance cash value if they desire as long as it is earning an interest rate.
Benefits and Catches:
There are certainly many benefits to having a return of premium term life insurance policy, particularly if you are young and healthy. This is because the premium rates are generally lower and if you outlive the policy you can use the money for a number of means.
Get Money Back: The biggest attraction to having a return of investment term policy is that the money you put in over the years is money that you will receive in return if you outlive the term of the policy itself. For many, this is the only reason that they obtain this type of policy, particularly if they are getting a healthy interest rate as well.
Borrow Against the Policy: Because the cash value is generating additional income, you can actually borrow against the policy if needed. This can be a valuable option if you need extra cash now to pay off debt.
However, for the many benefits that this type of policy provides, there are some disadvantages as well. Before you choose a return of premium policy, you’ll want to know all about the issues associated with this form of life insurance.
More Expensive than Basic Term: This is primarily a budget consideration, but considering that adding a return of investment rider can mean paying up to 50% or more every month is a big consideration depending on the size of the policy itself.
Cancellation: With return of investment if you should cancel the policy, you’ll lose more that if you simply had regular term insurance which can be quite disappointing to say the least.
The choices are going to come down to whether it is worth purchasing a rider for return of premium insurance compared to simply investing the difference in the money on other options. If you can invest the difference in a tax-deferred or tax-free account, then just using the basic form of the insurance is probably best.
However, if you have a higher income and are looking for investment opportunities that are safer, then going with a return of premium policy is probably the best since your money will be more guaranteed than trying to invest it into different accounts.