This is the second part of a post my brother Brian Hartstein wrote a little while back…
This is part II of a blog from back in January titled “The True Value of Term life Insurance” and coincidentally happens to be a perfect follow up to the last blog posted by Evan in March. In part I we explored the use of term life insurance not only as a risk management tool but also as a financial instrument with a high rate of return. We used as an example a 40 year old male non smoker who is paying annual premiums at current rates of $262 per year (less than $22 per month) for a death benefit of $250,000. One issue that was raised was what happens if he lives to the end of the 20 year term as all of the monies spent annually on the term insurance are gone. He did have the death benefit coverage over the 20 year period and a fabulous rate of return if he does pass away during this time frame but if he lives to the end of the 20 year period he is out all of the monies spent on the annual premiums.
If this is a concern then one powerful option to look at with the term coverage is the return of premium option – also known as ROPE. This option alleviates the above concern, as at the end of the twenty year period all of the monies spent on annual premiums are returned. Using the same fact pattern the cost with a highly rated insurance carrier for a twenty year convertible term policy with a return of premium feature and a $250,000 death benefit is approximately $1,062 per year or $88 per month. If he passes away at age 50 his rate of return is approximately 56.02% and if he passes away at age 60 his rate of return is approximately 20.38%. If he lives until the end of the twenty year period all of the monies he spent on the annual premiums are returned to him. Not a bad deal!
The main issue to consider here is one of cash flow. The difference in cost for the return of premium option is $800 per year or almost $67 per month. So if you cannot afford to be spending that extra amount every year then this option would not make sense for you. If you can afford it – then this option is extremely beneficial and one that you should definitely utilize. The only issue is the lost opportunity cost of the extra $800 spent annually for this option – which seems relatively minor when compared to receiving all of you premiums back at the end of the 20 year period. Aside from this you truly have been given “something for nothing” as you will have had the death benefit protection the whole 20 year period with all of you premiums returned at the end.