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Would You Like "Free" Life Insurance?

By Roccy M. DeFrancesco, JD, CWPP™, CAPP™ - Email Editor

Date : Feb 21, 2006

The quality of an insurance advisor's advice is something that is difficult for the lay public to determine. One of the age old questions is whether one's life insurance agent is giving proper advice that is in the client's best interest or that of the advisor.

This year, I will shed light on this difficult subject, and readers will know whether their life insurance agents are doing what's in their best interest.

A fun way to get started is an article about what I call “free” life insurance.

Have you ever heard of: Return of Premium Term Life?

Chances are that you have not. There are a few reasons for this, which I will discuss below.

The vast majority of clients under the age of 60 have purchased term life insurance at one time or another. Clients usually purchase 10-30 year level term insurance because it is the most inexpensive way to fund a death benefit without increasing costs for a specific period of time.

While most clients purchase level term life insurance, they also despise the concept of term life because they believe death will not occur during the term of coverage. Therefore, the premium at the end of the period was a total waste (although the client did have peace of mind while insured).

Insurance companies love to sell term life. Depending on the statistics you find, as a ball park number, 95% of all clients that buy term insurance do not die during the coverage period. That means if you purchased term life insurance you have a 95% chance that the premiums will be a waste of your money (and you are hoping for that because the alternative is that you are dead).

A very few select companies have come out with “Return of Premium Term Life Insurance” (ROPT). ROPT is very simple to understand. You pay a premium that is marginally higher than the level term life costs you normally would pay, and if you do not die, you receive the premium returned to you in full.

The rub is that you do not get investment growth on the premium paid. However, you do get returned to you the term premium you would have paid and never seen again in the event you did not die during the specified period.

Let's look at an example :

Assume Dr. Smith is age 38, has two kids and a wife. Dr. Smith's total assets are less then $1,000,000, and he wants to make sure that if he were to die in the next 20-30 years, his children would be taken care of (they would be able to go to college, have nice clothes and drive nice cars), as his wife would be, too (so she does not have to go to work in order to provide for the children and herself). Dr. Smith would normally buy 20-30 year level term until he found out about the ROPT.

Interpreting the numbers: The amount of premium paid per year was $1,540 more with the ROPT. Most clients would automatically resort to their default position when it comes to spending money, that position being, always opt for the less expensive product when it comes to insurance and invest the difference in the stock market.

If Dr. Smith invested the difference in premium, $1,540 per year, in the stock each year for the 30 year period, Dr. Smith would have approximately $86,503 after tax (capital gains and dividend taxes), assuming an 8% annual investment return. Dr. Smith, via his ROPT, will receive a guaranteed return of premium of $118,200, income tax free. The difference between the amount in Dr. Smith's brokerage account ($86,503) and ROPT ($118,200) = $31,697. (Remember that while Dr. Smith is investing the difference in premium ($1,540) each year, he still had to pay his traditional level term life premiums of $2,400 each year for 30 years to equal the premium paid each year with the ROPT policy $3,940.)

Final numbers: Dr. Smith would have to earn well in excess of 8% pre-tax in the stock market with the difference in premium in order to have more money than he would receive with his ROPT. And Dr. Smith has no guarantee that his money in the stock market will not earn less then 8% or even negative returns (as we have seen in 2000-2003).

Why haven't you heard of “Return of Premium Term”?

It's sad to say, but many life insurance agents don't know it exists.

It's also sad to note that many life insurance agents are “captive,” meaning they can only sell with one company, and if that company doesn't have ROPT, the agent can't even offer it to you.

Finally, many agents that do know of ROPT don't sell it because the commissions are less than non-ROPT.

Conclusion

If you have term life insurance, you should look into whether ROPT is a better and more financially sound product to purchase. Understand that not all ROPT policies are the same, and if your agent doesn't know or is not contracted with all the proper companies, even if you are offered ROPT, it might not be the best product or one at the best price.

Trustmakers has experts on the team to review your situation. If you wonder whether you have the right type of insurance, please e-mail clientservices@trustmakers.com .

Finally, we have an entire education module covering all types of life insurance polices, how they work, and which one is the best one for you. To purchase this education module, please click here.

Thank you for your kind responses to the various topics I have been covering.

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