30 March 2012 0 Comments

Term Insurance With Cash Values

Now that I’ve talked about taxation of life insurance death benefits, let’s take a look at cash values.  Wait!  Didn’t I say that term insurance doesn’t have cash values?  Yes I did, but in the past several years a term policy has been developed that does build cash value.  It’s called Return of Premium (ROP) Term.  Here’s how it works.

ROP Term Life Insurance is a concept that sounds like a great deal – in theory.  You buy a 15, 20 or 30-year Term Life policy and at the end of the term period you select, all of the premiums you’ve paid are refunded to you. All you have to do is stay alive. Sound too good to be true? Depending on your situation, it may or may not be.

For starters, you’ll pay a higher premium than you would have paid for a policy without this ROP feature. So if you die before your term is up, regular Term Life Insurance would have been a better buy. And what happens if you discontinue the ROP policy before the end of the term?

As a case study, let’s take a look at a 35 year-old male in the best Preferred-Plus Non-Tobacco User category who is considering a $250,000, twenty-year ROP Term Life policy.  The annual premium is $645. That means in 20 years, the policy’s guaranteed cash value would be $12,908 (20 X $645). If he pays the premium for the entire 20 years, $12,908 is the amount he’ll get back.

It will be tax free because the amount returned doesn’t exceed the total premium paid.  But here’s the thing: A $250,000, twenty-year Term Life policy without the ROP feature would have cost him only $163 a year.  He’s paying an extra $482 per year for the ROP policy. True, some guaranteed cash value begins to grow before the twentieth year. By the tenth year, that cash value would be $2,950, but the total excess premium paid at that time will have been $4,820.  He’s far from breaking even.

So is ROP Term Life Insurance a good deal? If you live to the end of the term and pay all your premiums, the tax-free return can be handsome. But those are two very large ifs – especially the last one. Before proceeding with an ROP Term Life policy, make sure you’re committed to keeping the policy until the end of its term period. And, remember, the most important reason to purchase Life Insurance is to provide security for family members who rely on your income. Do NOT buy an ROP Term Life policy if the increased premium means that you have to reduce the amount of death benefit to a sum that’s below what your family requires. Stick with a regular Term Life policy instead.

Coming Up Next: Obligations and Options Related to a Term Life Policy

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