Return of Premium Term Life - Purchase "Free" Term Life Insurance with A Return of Premium Rider

The vast majority of physicians under the age of 60 have purchased at one time or another term life insurance. Usually physician 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 physicians 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 physician did have piece of mind while insured).

Insurance companies love to sell term life. Depending on the statistics you find out there, as a ball park number, 93% 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 93% 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 then the normal level term life costs you normally would pay and if you do not die, you get 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.

Let's look at an example:

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

Interpreting the numbers:

The amount of premium paid per year was $1,540 more with the ROPT. Automatically most physicians will 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 her ROPT will receive a guaranteed return of premium of $118,200 income tax free.

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, she 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 she would receive with his ROPT. And Dr. Smith has no guarantee that her money in the stock market will not earn less then 8% or even negative returns (as we have seen in 2000-2003).

Conclusion

No one likes purchasing term life insurance due to the fact that approximately 93% of the time paying the premium will turn out to be a waste of money due to the fact that death does not occur. With ROPT you are getting free death benefit coverage due to the fact that you will receive every dollar paid in premium back via the return of premium rider. This will allow Dr. Smith (and you) to avoid feeling like paying your term life premiums is a waste of money due to the fact that Dr. Smith believes she will be in that 93% bracket of people that do not die during the term life coverage period.

Since I do not like to give free advertisements to life companies I have not listed the company's that have the ROPT. If you would like help determining if using a ROPT policy can save you money over your current term life policy contact Roccy.

Roccy DeFrancesco, J.D., is the President of Financial Management Group, LLC a company devoted to help small business owners (specifically physicians) on asset protection, income and estate tax reduction. He can be reached via email at This email address is being protected from spambots. You need JavaScript enabled to view it. or phone 269-469-0537. Purchase Roccy's Book The Doctor's Wealth Preservation Guide".

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