insurance policies reward you for staying alive
By Leonard Wiener
David Sharpe of Los Angeles is forking out $11,240 a year in premiums for term life insurance, but he isn't sweating the payments. He's counting on getting all of them back after the policy expires in 30 years, assuming he's still alive--a total of $337,200 tax free. At 34, the personal agent and manager says, "It is my intention to live well beyond the 30 years that my insurance covers."
That sentiment may explain why a growing number of life insurance buyers at Mutual of Omaha, AIG American General, Federal Kemper, and other insurers are looking favorably at extra-cost return-of-premium policies as an alternative to traditional term--the low-cost unvarnished insurance that many advisers recommend as a way to buy the greatest amount of protection for the smallest amount of money. Term coverage offers no investment component or increasing cash value--just a promise that if you die while the policy is in force your beneficiaries collect. Stay healthy? It's like not collecting on your homeowner's insurance because your house didn't burn down.
But the pure protection of term life doesn't have the sizzle that insurance agents crave, nor the seductive appeal to buyers of a guaranteed payoff, live or die. "People do not like to spend money on something they really don't think they're going to use," says Doug Israel, senior vice president of product development at American General. One reason traditional term is often so cheap is that insurers agree that for many buyers--with long life expectancy and limited length of coverage--the chance of collecting a benefit is small, says Byron Udell, chief executive of AccuQuote, an online insurance broker.
Bonus bucks. Return of premium plays off that low risk but increases the cost. A common return-of-premium policy might cost about 25 percent to 50 percent more a year than regular term. It's the extra amount, which the insurer then invests, that provides the cash for the returned premiums. It's like buying traditional term and investing an extra sum that will grow at a steady pace without risk. It's not "free" insurance, but to many it feels like it is. "You have nothing to lose; you get all that money you paid in back," says Kimberly Frenette, 38, of Plainfield, Conn., who bought a $100,000 policy along with one for her husband.
Insurance purists are skeptical. "It's a sales gimmick," says Joseph Belth, professor emeritus of insurance at Indiana University and editor of The Insurance Forum. He says the payback feature caters to people prone to pointless second-guessing. "You buy insurance for financial protection; you can't look back and say, 'I made a mistake because I didn't die.' " And if your budget is limited, it's better to buy as much regular term as you need. "Don't get confused by these add-ons," advises J. Robert Hunter, director of insurance for the Consumer Federation of America.
The biggest determinant of the extra charge for a return-of-premium feature is the length of time until you get the premiums back. A 30-year policy is less costly than a shorter one because there is more time for the additional funds to grow. A 35-year-old male in good health might pay $970 annually for a 30-year, $500,000 return-of-premium policy. That's $295, or 44 percent, more than regular term from the same insurer, according to AccuQuote. A 20-year policy might cost $1,175, or more than three times the cost of regular term. A 15-year policy, at $1,645, is almost six times the cost of traditional term.
Insurers tend to promote policies of 30 years as financially most sensible. But that's a lengthy commitment many people may have trouble keeping. People are notorious for letting their coverage lapse because of changed family conditions, budget constraints, or the lure of a better rate at a different firm. Drop out early with a return-of-premium policy, and at best you'll get back only a portion of your premiums--perhaps 10 percent after 10 years on a 30-year policy, building to about 35 percent or so by year 20. In the unkindest cut, if you do die your heirs will get the policy's face value just as if you had bought the cheaper regular term. "You will have greatly overpaid for your insurance," says Peter Katt, an insurance adviser in Mattawan, Mich.
Though overall sales are still small, insurers report particular interest for the policies among younger folks. Single parents, especially young women, are keen on the coverage, says Beth Hempel, a product development manager at Mutual of Omaha. "They are very concerned about leaving a dependent without support but young enough that they really do not think their beneficiary will ever collect anything."
Fair return. Though these policies aren't sold as investments, the return from sticking with one may not be all that bad. By counting the extra premiums paid as the amount invested and the overall premiums paid back as the investment payoff, AccuQuote figures annual returns of roughly 2.5 to 9 percent on a sampling of policies--the longer the policy's life and the smaller the extra premium, the better the return. (You'll need a financial calculator to estimate this yourself.) A bonus: If you invest this way on your own, the net gain may be taxable; wrapping this up in an insurance policy makes the total payback a refund of the premiums you paid, and thus not taxable.
If considering return of premium, compare the extra cost of an insurer's policy not just to its own traditional term but also to regular term at competitors. And no matter what, be ready for some salesmanship. Return of premium might be pushed after you express interest in lower-cost regular term. It's hard to ignore a pitch that rewards staying alive.
