Can
you have your cake and eat it too when
purchasing term life insurance? On
this surface, the common return of
premium rider seems to say yes.
Not too quickly. There's a cost
for the false sense of security that
this rider provides. Let's look at
how the return of premium rider really
plays out.
We
get the question all the time and we're
sure it's in the back of a person's mind
when considering his/her
term life
insurance needs. "If I don't pass
away, I just threw away all that money".
This is only human and a good understanding
of the risks associated with not getting
life insurance usually helps to bring
these people around. That and the
nagging feeling that your family is left
exposed. The carriers came up with
a rider to address this sense of future
regret...the return of premium.
Essentially, with this rider, if you do
not trigger benefits, the carrier will
return all or some of the premium you
paid over the term of the life insurance
policy. This would seem to be the
best of both worlds...I have term life
insurance protection and if I don't use
it, I get my money back. So what's
the catch. First, the carrier will
charge you an additional premium for
this option. It can be quite a bit
higher...maybe 1/3 of your core term
life protection. This is just a
different twist of the old
term life
versus whole life comparison where you
are paying the carrier extra premium to
give you back some semblance of "money
back". Whether its the premium
returned with this waiver or the "cash
value" slowly (excruciatingly so)
accumulating with your whole life
policy, it is all a "portion" of the
additional premium you are paying to
have that piece of mind. In our
view, it's a false sense of security
used as a marketing tool to use people's
misunderstanding of how insurance really
works ("I didn't use the policy, why
can't I have my money back") as a way to
earn additional revenue. That's
just our opinion but my personal life
policy is term life...without the rider.
Think
of it this way, the carrier is taking
the additional premium and investing it.
The amount of additional
life insurance
premium is calculated to allow them a
satisfactory return on investing it.
This return should allow them to return
the premium in future dollars (worth
less than when you are paying the
premium now) plus an excess amount
(usually profit or margin). If you
trigger the benefit, your core premium
pays for this risk as with any other
plan. If you do not trigger the
benefit, they return your premium with
less costly future dollars after
investing it all that time. In a
nutshell, that's how this works.
Your probably better off investing the
additional premium yourself and the
gains will be your "return of premium".
For those that absolutely feel more
comfortable with a return of premium,
then by all means. Just understand
that you are paying for it in the end
since like anything else in
life...there's no free ride with term
life insurance and/or the riders that
dazzle the market. In our opinion,
you're better applying that additional
premium to either your own investment or
more core term life insurance coverage
which has the lowest cost per dollar of
coverage anyway.
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