If you aren’t excited about the higher premiums a return of premium policy requires, or you think there’s a catch, you might wonder what alternatives you have.
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Term life insurance is the most common insurance policy because it covers you for a predetermined time. It’s also usually cheaper than permanent life insurance.
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So what alternatives do you have to ROP policies?
Here are your options.
Traditional Term Life Insurance
The most obvious alternative to ROP policies is a traditional term life insurance policy. Sometimes called ‘use it or lose it,’ you’re paying for coverage in case you die prematurely.
If you outlive the policy, you can either renew it, let it expire, or get a new term life insurance policy after conducting a review.
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Some term insurance policies also allow you to convert to a permanent policy down the road if you can afford the premiums or decide it’s a better option.
Most insurance companies offer term life insurance, so you have many options.
Invest your Money
If you choose a traditional term life insurance policy, you’ll pay lower premiums than an ROP policy.
You can invest your savings, which is a better option than an ROP policy.
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When you buy an ROP policy, you give the insurance company an interest-free loan. However, they only return your premiums paid; they don’t pay interest.
Rather than paying that higher amount, you could invest the same funds. If you leave the funds in the account long-term, you’ll have compounded earnings that far outweigh the premiums you would get returned if you outlive your life insurance policy.
Investing money ‘on the side’ is the best way to ensure you have extra money should you outlive your insurance policy. For example, you can invest in a tax-advantaged (IRA) account or taxable account. You might even consider putting the money in a high-yield savings account.
This also puts you in control. If APYs drop, you could take your money out and invest it in bonds or treasury securities. The same is true if the market crashes or your stocks don’t perform as expected.
If you’re not ready for a permanent life insurance policy and a return of premium policy seems too risky, consider your alternatives.
The key is that you aren’t giving the insurance company ‘free money’; instead, you earn the interest or compounded earnings by investing yourself. So an ROP policy isn’t necessary, but life insurance is if you want to protect your loved ones.