WCI Reader Question: Is Premium Term Life Insurance A Good Idea?
What do you think about return on premium for a young doctor? I’m 30, we have a 1-year-old, and the difference is about $700/yr for 30-yr term vs. 30-yr term w/ROP. I’m in great health and no family history of chronic illness, so I think my odds of making it to 60 are excellent.
With regular term life insurance, I’m losing my entire premium at 60, so active investment of that $700/yr saved will have to generate a decent ROI to cover the premium, principal, and tax liability. To me, ROP makes sense if you can afford it, but I’ve seen other opinions that it’s just a waste of money. What do you think?
Why Return of Premium Term Life Insurance is Not a Good Investment
I've written before that you shouldn't mix insurance and investing, and return of premium term life insurance (ROP) is a good example of why. It sounds great. You pay your premiums, and if you die, great! Your poor wife gets a million bucks to console herself. If you don't die, also great! You get all your money back. It's like free insurance, right? Not quite. There are several reasons why you almost surely don't want this.
Opportunity Cost Of Return of Premium Term Life Insurance
It's important that you don't forget about the opportunity cost of that extra money you're paying. In fact, it's quite easy to calculate out the actual return you're getting on that extra money you're paying. Although it's a 30 second task to get term life insurance quotes from term4sale.com, getting a quote on a return of premium policy is a little more complicated. I asked Larry Keller if he could get them for me and he provided me with quotes for a $1 Million policy on a healthy 35 year old non-smoking male in my state, both for their regular old term policies as well as their fancy ROP policies. I then calculated out the difference in cost between the two, the total premiums paid in on the ROP policy, and the guaranteed return you're getting on that extra money. This chart breaks it down:
| Years | Term Cost | ROP Cost | Difference | Total Premium | Return |
| 15 | 585 | 2666 | 2081 | 39990 | 3.04% |
| 20 | 665 | 1926 | 1261 | 38520 | 3.88% |
| 30 | 885 | 1748 | 863 | 52440 | 4.23% |
As you can see, the guaranteed return isn't exactly spectacular, barely besting the historical rate of inflation. (Remember this is a nominal return.) If I can't beat that over 30 years with my portfolio, even after-tax, then my retirement isn't going to be very lavish.
It's also important that you remember who's providing the guarantee. If the insurance company goes out of business, you're probably unlikely to get all of those premiums back, and perhaps not any of them. Some states will guarantee the cash value of permanent life insurance policies up to a certain amount in case the insurance company goes out of business, but I've never seen anything suggesting they'll give you anything for a ROP policy from a failed insurer.
Return of Premium Term Life Insurance Is More Expensive
If I haven't convinced you yet, consider the second reason why ROP isn't a very good idea. Remember that the regular old term market has a lot more participants (both insurance companies and clients) and thus is more competitive and efficient with pricing. You’re just buying a plain old widget. Once you start adding bells and whistles like ROP, there are fewer companies and more variations between them, making it harder to compare apples to apples and know when you’re actually getting a good deal. When he sent me the quotes, Larry mentioned to me that (as I expected) very few companies offer ROP insurance. They are offered by AAA Life Insurance, Cincinnati Life Insurance, Prudential, Transamerica, Assurity Life Insurance, Reliastar Life Insurance, and American General. So you only get 7 options to choose from, instead of the hundreds available for plain-Jane term insurance. To make matters worse, not all of these companies offer ROP policies over even common guarantee periods such as 15, 20, and 30 years. Prudential happens to, and that's why I used them in the chart above. What are the odds that one of these companies offers the cheapest term insurance AND the best ROP policy? Not very good it turns out. In fact, I went to term4sale.com and found the cheapest insurance (rated at least A-) for each guarantee period and compared that to the Prudential ROP quotes above. It makes the returns on these policies look even more abysmal. Incidentally, the only one of those 7 companies that made the top ten cheapest insurance policies was Cincinnati Life Insurance Company.
| Years | Term Cost | ROP Cost | Difference | Total Premium | Return |
| 15 | 300 | 2666 | 2366 | 39990 | 1.48% |
| 20 | 435 | 1926 | 1491 | 38520 | 2.38% |
| 30 | 790 | 1748 | 958 | 52440 | 3.64% |
Lost Flexibility With Your Money
There are two other issues with these policies that cause you to lose flexibility. The first is the inability to “refinance” your insurance. Sometimes you can replace your insurance with cheaper insurance. It doesn't happen a lot because life insurance generally gets more expensive as you age, but it can happen if rates drop, if your health improves, or if you give up a dangerous hobby. If you have a ROP policy you may not want to do that (since you forfeit all those premiums you've already paid.)
I advocate an approach where your portfolio gradually grows to replace your need for life insurance over time. You should try to match your terms to your predicted financial independence date, erring a bit on the conservative side in case of inadequate savings or poor portfolio performance. Once you hit your “retirement number”, you can just cancel your term insurance and save the premiums. Not so with ROP insurance. If you want those premiums back, you're stuck with the policy until the bitter end.
So keep your insurance and investing separate. Buying life insurance is easy. Don't complicate it.
good discussion and i agree with your points about life ROP and it isnt worthwhile.
i wanted to make a comment about ROP disability insurance. i currently have a met life ROP disability policy that refunds 50% of disability premium every 5 years or about 16k. fortunately my group pays for disability coverage so the only thing i pay is taxes on this (in event of disability earnings would be tax free). while the ROP is more expensive, it is about the same cost as other group member’s Guardian policy so admin approved me to do this because it isnt costing the company any more (win win). in my scenaio i think it IS worthwhile to do ROP because essentially i am only paying slightly higher monthly taxes on disability insurance but get significant return on investment every 5 years (if not disabled)
That’s a new twist I haven’t seen before. But I doubt there is a free lunch there. I’ll bet your policy isn’t as likely to pay as your co-worker’s Guardian policy. I can’t imagine it is as strong a policy.
its unlikely to be own occ
it is transitional own occ but everything else is equal. which is fine for me. i think its extremely unlikely if i was to become disabled that i would find another profession where i would make more than i do now. my benefits wouldnt get reduced until i started making more than pre disability annual income (and disability benefits dont count towards it). its worth the trade off for me and i still have all the other riders (cost of living, etc). so in this case i think ROP is worth it.
i wouldnt do this if my employer didnt cover or if i was an independent contractor…then it wouldnt make sense.
Great call – insurance and investments each serve a separate purpose, and you shouldn’t mix them. The only winner of doing that is the broker who sells it to you and makes a huge commission.
i understand your logic but either the insurance company is making less off your policy or the transitional wording is such that you are less likely to be paid. Any of the agents care to comment on the strength of wording of such policies. I dont have any friends with this type of policy(that im aware of).
Rex-
Two companies offer a Transitional Occupation definition of Total Disability – MetLife and Principal.
A policy with this definition pays benefits if you are disabled and “are prevented from performing the material and substantial duties of your regular occupation but are gainfully employed in another occupation.”
It is important to note that the monthly benefits under this type of policy could be reduced if your earnings from the occupation you are engaged in, plus any other disability benefits you receive, plus the benefits you receive under MetLife or Principal’s policy exceeds your prior earnings. Meaning, as Jon stated, that you can’t earn more than you did before you were disabled between your disability benefits and income from a new job.
For example, if one was earning $300,000 as a General Surgeon and purchased a policy with a monthly benefit of $10,000 ($120,000 annually) that included MetLife’s Transitional Your Occupation (TYO) definition of disability, he or she could not earn more than $180,000 from another occupation without causing his or her disability benefits to be reduced. This is because his or her post-disability income would then exceed their pre-disability income.
Additionally, any increases in the policy’s benefits due to a Cost Of Living Adjustment (COLA) Rider that was purchased would further reduce the amount that he or she could earn in another occupation. This is something not often understood by the agents and brokers selling this policy or by the physician who might ultimately purchase it.
Another problem is that if the General Surgeon changes jobs and goes from private practice (with only an individual policy) and becomes a hospital employee earning the same $300,000 but as part of his benefits package is provided with group LTD of 60% of salary with a maximum monthly benefit of $15,000 ($180,000 annually). Now, if disabled, this client would recieve $120,000 annually from MetLife and $180,000 annually from the group LTD carrier. How much can this physician now earn in a new occupation? You guessed it – nothing. They have no incentive to work at all!
While this definition is better than that of a policy with Modified “Own-Occ” or “Loss of Earnings” definition of total disability, it is not nearly as good as a policy with a true “Own-Occupation” definition of disability.
As an FYI, at this time, Metlife does make ROP available with their “Your Occupation” (“Own-Occupation” definition of total disability. My guess is that Jon purchased his policy before this liberalization took place.
It is also interesting to note that in California, those in class 4A-M (surgeons and other invasive practitioners) cannot purchase the Regular Occupation Rider and for this reason some agents and brokers, dealing with clients in that state, will recommend the Transitional Occupation definition of total disability.
Finally, for those physicians in other states that purchase the Regular Occupation Rider, a 24 month mental and nervous limitation is required. However, with the Transitional Occupation Rider, that limitation is not required, which is another reason a client might have been presented with this defintion instead of a policy with a true “Own-Occupation” defintion of total disability.
In my opiniion, I would avoid this definition if possible. It only complicates things and forces a disabled physician to provide their insurance company with income documentation on a monthly basis for the duration of their claim.
I will also post a premium example along with the ROP feaure and the rate of return that one would receive by purchasing this feature – much like WCI did with ROP Term.
Hope this helps.
yea thanks that was great. i imagine your rate of return is going to be different.
thanks for reply. for me the transitional own occ with ROP is what i want. i agree probably not for majority and only thing that makes it worth doing is that my group pays for my policy (and i pay the taxes on it). *** i wouldnt choose ROP if i had to buy it on my own and generally agree with the philosophy of not mixing insurance and investments***
i have to have SOME policy. between own occ without ROP and transitonal own occ ROP the difference in monthly taxes is not much. you pointed out the inconveniences of submitting monthly statements, cola, other group policies that could potentially lower earnings, etc…but again the amount isnt lowered until i exceed pre disability income. it’s very unlikely that i would exceed pre disability income if disabled. maybe if i wrote a book or became famous? i certainly wouldnt go back to a different residency speciality training. if i did exceed, what a blessing and i didnt need disability insurance after all to protect my earnings as a physician (not likely to happen).
yes i was presented with metlife own occ ROP (clearly superior to what i have) but this was more expensive than guardian’s regular own occ without ROP. i couldnt justify my group to pay for more expensive policy with ROP 🙂
so for me its worth the trade off getting a little less superior policy for 50% ROP every 5 years. i am guaranteed to make at least what i do now.
Jon-
I agree with your assesment of your situation and, based on your fact pattern, it makes a lot of sense.
Thankfully, unlike most physicians, you have a complete understanding of your policy, how it works, and the risk (as small as it might be and the larger your income is the less concern that you should have) associated with the contract compared to the reward of getting 50% of the premiums back every 5 years.
The TYO defintion of total disability is all about making an insured whole but, at the same time, not allowing them to “double dip” or be in a financial position that is better than they were before.
For what it’s worth, with your practice paying the premiums and adding them back to your taxable income, I think it is a good compromise. As you stated, this is often not the case for most.
in essence what he has done was increase his salary for a slightly lesser policy.
id still be curious what the ROI is for someone doing it alone since im sure the issue will come up again.
I ran the numbers for the following MetLife disability insurance policies with and without a Refund Of Premium Rider assuming a 35 year old male Emergency Medicine Physician (class 4M) in the state of Utah and came up with the following:
1. $10,000 month, payable after 90 days, with benefits to age 65. Also included was a Basic Residual Disability Rider (No Recovery Benefit), a 0-10 COLA Rider and a Your Occupation Rider.
The annual premium for the basic insurance is $5,703.00. The annual premium with ROP is $9,295.89. At the end of 5 years, $23,239.73 would be refunded.
2. $10,000 month, payable after 90 days, with benefits to age 65. Also included was a Basic Residual Disability Rider (No Recovery Benefit), a 0-10 COLA Rider and a Transitional Your Occupation Rider.
The annual premium for the basic insurance is $4,744.00. The annual premium with ROP is $7,732.72. At the end of 5 years, $19,331.80 would be refunded.
According to MetLife’s reference manual, the net cost after five years (not taking into account the time value of money) if no claims or experience refunds are paid during the period is 18.5% less than if the ROP Rider wasn’t purchased.
So in example one, you’re paying an extra $9295.89-$5073.00= $4222.89 per year for 5 years (a total of $21,114.45), then getting back $23239.73. That’s a return of 3.2%. What a deal! I guess it’s better than what a 5 year CD is currently paying.
In example two, you’re paying an extra $2988.72 per year for 5 years (a total of $14,943.60), then getting back $19,331.80, a return of 8.7%. That actually seems pretty good. I’m surprised it is so different, but assuming Larry’s figures are accurate, I suppose it’s a better deal to use the transitional own occupation definition IF you’re interested in buying a ROP policy. Personally, I’d probably avoid a ROP disability policy, although I couldn’t fault someone for taking one with a guaranteed 8.7% return on it.
The numbers are correct.
However, you took $9,295.89 – $5,073 (it should be $5,703). So, the difference is $3,592.89. That should provide the insured with approximately the same return as option 2. So, it really does not matter if one purchases the Your Occupation or Transitional Your Occupation Rider in terms of the ROP.
I am not sure the return is similar for all insureds. This might vary based on age, gender, occupational classification. So, it is important to look at the numbers, and make sure you have the cash flow and are willing to pay the higher premium, if you are considering ROP.
Finally, please note that the MetLife Refund of Premium is Not available in CT, FL, NJ, NY, OR, PA or TN.
out of curiosity, why wouldnt they be available in those states?
i realize each state has to approve it but what would make those states such that either they wouldnt approve it or the company says its not worth pursuing?
i have to admit the ROI is higher than i anticipated for this product. I wonder if the prices will change with continuation of the low interest rate environment. I imagine that few people who are deadbeats purchase this product. If your back is going to hurt you next year, then no need to pay more. Id be curious if the claim data was different between the two groups.
i bet claim rates for rop are lower than non rop. if you are disabled, you lose the rop.
Thanks for catching my math error. So that means the return on these things can be ~8.7%. That’s perhaps the best guaranteed return I’ve yet seen in an insurance product. I don’t see how they can do that UNLESS what jon and rex say is true- there’s a lower likelihood of payout. It’s kind of like the insurance company is aligning its interests with yours- you both make out better if you don’t claim disability unless you really, really need it.
Very interesting. Maybe worth a separate post some time.
My wife and I (both lawyers; I’ve found your blog useful as a non-doctor) were quoted $10,839 per year for MetLife Income Guard disability insurance policies with the return of premium rider. After 5 years, we will receive $27,098 back (paying effectively $5419 per year). Without the rider, we would pay $6,377 per year. This seems like a good deal to me, but I’m curious as to your thoughts.
And while we’re on the subject, is it worth an extra $1k per year for the graded lifetime benefit?
It is best that you do a Return of Premium analysis on each policy to determine the rate of return that you will get on the additional premium you will be paying for the rider.
If it is favorable and you have money sitting in a bank account that you don’t plan on using, it is earning very little and you can afford to lay it out for insurance premiums, it might make sense. I have done some calculations and the ROP rate of return has been in excess of 8%.
While lifetime benefits are the best that one can own, you must take a few things into consideration:
1. You must be disabled prior to age 45 in order to get 100% of your monthly benefit for life.
2. If you are disabled after age 45, you will still get full benefits until age 65 and then the lifetime benefit (the post age 65 portion) will decrease be 5% per year. Meaning, if you are disabled at age 46, you would get 100% to age 65 and the 95% (100-5) for the rest of your life.
Lifetime benefits used to be a great deal in the past but are now very expensive and often talked about but not purchased or sold.
Have you done any comparison shopping or looked at other carriers? Attorneys, like physicians, often can qualify for discounts on individual disability insurance via their employers or professional associations. Additionally, if unisex rates are available, you may be able to save a substantial amount of premium on your wife’s policy.
Hope this helps.
Keep in mind you don’t get the premium return if you get disabled. So you can’t just do a straight ROP calculation. If you actually use the policy, even for a few months, you just blew $1000 a year you didn’t have to.
Absolutely. It is just insurance on insurance and you have to decide if the additional premium risk is worth the potential reward of getting 50% of your premiums back (less any claims or experience refunds paid).
I like your explanation/ breakdown about the policy, it makes me understand the policy better. I spoke to an agent from State farm last week. I still strongly believe the return of premium insurance is still my best bet.
Thanks for the responses!
Jim, it’s actually worse than blowing the $1k per year, which is the cost of MetLife’s graded lifetime indemnity rider over Guardian’s retirement protection rider (Guardian’s graded lifetime benefit is more expensive). There is no refund of premium if the policy is used over during the previous 5 years. So because the ROP rider would cost us an extra $4463 per year, we would potentially be out almost $18k if we paid for the rider for 4 years and then both had a claim under our policies. Worst case, but something to consider when calculating the ROI.
I am also now questioning whether I even want the retirement protection rider after finding your March 23, 2012, post on the subject. We are maxing out our coverage and have the guaranteed insurability rider. Without a retirement protection rider (i.e., graded lifetime indemnity through MetLife or retirement protection rider through Guardian), we would save about $1200-2200 per year (sadly, Lawrence, we appear not to have any discounts through our employers or bar associations).
This is our first time buying non-medical insurance. I had no idea how hard it would be to strike the right balance…every additional item is “only” x dollars, which we can afford, but likely won’t need…but there’s always a “what if”… So I think I will go with the basics (max benefit, GIO rider, catastrophic disability benefit, 3% compound COLA, enhanced residual disability benefit, own-occupation rider) and hope for the best.
Thanks again for the advice!
As an FYI, if you are going with MetLife, make sure to read the criteria to qualify for benefits under the Catastrophic Disability (CAT) Benefit Rider. It reads more like a Presumptive Disability clause and is not the same as the other companies out there.
Sheer nonsense and half-truths. [Ad hominem attack removed] The rationale is simple: are you going to buy/own term insurance for at least 20 years? Yes? Well, then do you plan on dying in that 20 years? No? Well, then why buy the term? Oh, it’s because you MIGHT DIE and others will be deprived, right? How commendable (really). Well, if you don’t die, then money down some rathole, right? Ok, for a given spread, if you don’t die, then you get ALL the premium back at the end of 20 years. So, you think you can do better deploying the spread somewhere else? Ok, if the IRR on the spread computes to a 5-7% non-tax rate of return (equivalent to 9-10% pre-tax [ad hominem attack removed]). Where else can you get that on a GUARANTEED basis in your portfolio (one that will replace the full value of the portfolio’s future growth if you die)?? This isn’t a maybe, it’s not a wish. It’s a contract. [AD hominem attack and profanity removed.]
Welcome to the forum. You’ll notice that ad hominem attacks and profanity are routinely removed from posts here.
If buying a return of premium policy were the equivalent of a tax-free 9% return, then it would be a good idea. Unfortunately, it isn’t. But you have to run the numbers to see what it is. Once most people do, they’ll elect to buy a regular policy and invest the rest into their portfolio. As you’ll notice in the post, these returns are typical just 3-4%. If you have an illustration that shows that the difference between a ROP policy and the lowest rate policy available for that individual would be the equivalent of a 7% return, I’d love to see it. Until then, I’ll continue to assume it doesn’t exist.
You might be right about the differences between ROP and straight term, but your fallacy is in your thinking that the person who is going to take a straight term policy would invest the savings. That might be true for a some Americans, but historically that is not the case,. otherwise, no one in their right mind would buy universal life or whole life. These two types of policies accrue a cash value, but the company keeps the cash value if you die before the policy expires. I used to mariket term insurance, and in two cases, my clients ended up with significantly more money than they otherwise would have with their whole life policies because I helped them invest the difference in one case in mutual funds, and in the other case, in Walmart stock, where Walmart matched 10% up to $1800. There are too many things. thouth, that come up that come up in life, where people don’t end up with a lot of money in savings. ROP guarantees you are going to save that money unless you cancel the policy.
I find the “forced savings” argument to be a very weak argument for permanent life insurance. People who can’t save don’t do it just because they own a whole life policy. They eventually let it lapse. In fact, about 80% of whole life purchasers eventually let their policy lapse. If you can save every month into a whole life policy, you can save every month into any other type of investment.
I am an independent licensed life and health agent. As such, I am contracted with several carriers offering ROP term. I offer prospects a side-by-side comparison of a carriers top and non-rop premium for a given amount of coverage. Some like the idea of top and some don’t. If the person understands what rop means to them it’ s their call.
The cash back can be used to pay a mortgage off early saving interest costs. Did you figure that into your roi? Cash back could also be used to buy paid up insurance. Imagine never having to pay another dime for coverage. Did you figure that into your roi? I don’t think you did.
Bottom line: you are only offering your opinion. Opinions vary.
Weird, someone that sells it for a living that thinks it is a great deal. I never see that with insurance.
Weird?
What’s weird is I never said it was a “great deal”, I let the prospect decide that. Some cases I work ROP is simply not available. In some cases it may be an option and it may not be in others. Every prospect is unique.
What’s weird is that you “never see that with insurance” which tells me you really do not understand the market much the less are involved in direct sales.
What’s weird is you did not address my two questions. Probably because you don’t have an answer.
What’s weird is I’ve NEVER had a prospect ask what the ROI is on such a plan. It’s not a complex concept as you make it to be and it would be easy to do the math for the client. The ROI on such a plan is just one criteria for the prospect to consider.
What’s weird is you sound like a Dave Ramsey-wannabe. Bad mouth whatever and whoever you don’t agree with.
Got your White Coat dirty on this one?
Your questions were so silly I thought they were rhetorical and you didn’t want an answer.
Just because your clients don’t ask for something, doesn’t mean the right thing to do is to not give it to them. Why not phrase it “You’ll get a return of 1-4% on your money with this ROP thing, or you can invest in index funds in your retirement accounts and probably do much better in the long term.” And the reason why you don’t give them that info is either because then they don’t buy your insurance policy with all the bells and whistles and your commission is lower or because you don’t know how to calculate the return or because you don’t think they’ll care. Guess what? They do.
ROP is a gimmick used to sell insurance. When most people understand how it really works, they don’t want it. This post is explaining how it really works.
[Ad hominem attack deleted and poster banned. Once more an insurance agent has mistaken my virtual living room for a virtual side walk where he can say anything he wants without consequence. What a surprise.-ed]