Originally created 05/04/04

Life insurance refunds premiums - but it takes a while

NEW YORK -- There's an emerging life-insurance product that promises to fully refund your money if you live long enough to collect.

So-called return-of-premium term life insurance is being touted as the solution to long-standing problems with the current line of life-insurance products.

Regular term life insurance, while cheap, is often viewed as money down the drain because you don't get anything out of it unless you die. Permanent life insurance offers an investment component, but it's often viewed as too costly and complex. Return-of-premium insurance offers benefits from both worlds since its cost structure is closer to term life, but it also offers a savings component like permanent insurance.

Still, interested buyers need to consider the potential pitfalls of this type of insurance before buying it. The main thing to know is that you win with return-of-premium insurance only if you hold the policy until it expires. Plus, you won't be able to take advantage of further drops in life-insurance premiums, which are expected to continue due to revised mortality expectations. Finally, don't assume all return-of-premium products are cheap compared with term life.

"This is one of those look-before-you-leap deals," said Robert Bland, chief executive of Quotesmith.com Inc., which operates the Web site Insure.com.

Few companies offer return-of-premium policies, although the offerings are growing. Fidelity and Guaranty Life Insurance Co. launched a return-of-premium term product in 2001, AIG American General, a unit of American International Group Inc., followed in 2002, and Aegon N.V. launched one in March of this year.

The attraction of the policies is clear: A healthy 40-year old man who wants a $500,000 death benefit might pay $895 a year for a term life policy, according to data from Insure.com. The cheapest 30-year return-of-premium policy would cost an additional $337 a year. But that's far less than he would pay for the cheapest standard permanent life policy, which would cost $3,252 a year. (All the quotes were from companies with an A+ insurance rating.)

And the benefits of the return-of-premium policy are greater than the term life policy. After 30 years, the policyholder would be refunded a total of $36,960. To get a $36,960 lump sum by investing the additional $337 he paid in premiums in stocks and bonds, the policyholder would have needed to ensure an average rate of return of about 8 percent a year.

There's no data on how many return-of-premium policies are terminated early because they're so new. The average term policyholder, however, dumps insurance within eight or nine years, according to 2001 data from Limra International, an industry group in Windsor, Conn. Some insurance professionals think return-of-premium policy lapse rates will be similar. Others believe that return-of-premium lapse rates will be better because there's financial incentive for sticking it out.

If you do cut out early, there may be a refund for a portion of premiums. But the amount of the return isn't usually worth the added cost of this insurance. Fidelity & Guaranty Life, for example, will refund 15 percent of premiums paid to a policyholder who stops payments on a 30-year policy after 15 years.

One way to gain flexibility would be to nab a shorter-term policy. But this method can be costly. A 15-year return-of-premium policy from AIG American General for a healthy 44-year-old with a $500,000 death benefit is costs more than $1,500 more than AIG's standard 15-year level term policy, according to Quickquote.com.

People who want a short-term return-of-premium are often better off investing the addition premiums they would have paid, said Byron Udell, CEO of Accuquote.com, which sells life insurance, including return-of-premium products. He believes the 30-year term offers the best deal and thinks most customers agree.


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