Return of Premium Life Insurance – Worth the Extra Cost?

Something I frequently discover working in the insurance world is other insurance brokers trying to convince all of their term life insurance clients to add on the return of premium rider. However, while the prospect of getting every penny of your cash back seems wonderful, is adding the return of premium rider suitable for you? This rider, or additional policy benefit, raises the policy holder’s price, although at the completion of the term, if the insured has not died, the policy owner receives back every dime he has paid in premiums. This extra benefit can elevate the premium anywhere from 30% to 200% of the level term with no rider added. There are two schools of thought here: Some figure, “Why should I mind paying double the premium, since it will all end up in my pocket one day?” Other folks, however, want to pencil out the details and tally whether or not adding the extra benefit is a wise financial decision for them. The answer, of course, is that it depends on some variables, which we’ll discuss.

But first, let’s address life insurance with the ROP benefit acting like an investment. Specifically, it’s not, to be exact, but here’s how some investment-savvy folks see it. To appraise what sort of dollar benefit, or return on investment, you’ll derive from return of premium, begin by taking note of what the cost of the rider is. Now, if I were to invest that amount in a traditional investment, how much would I have to gain to end up being equivalent to the total premium I’ll have returned to me at the termination of my policy?

For example, if your return of premium policy costs $500 more per year than your regular term policy, and 20 years down the line, your return of premium policy will pay you back $25,000, then you can do some quick math on a financial calculator and find that if you were to take that $500 and invest it elsewhere, you’d have to earn about 9% in that investment for it to grow to $25,000. Well that’s a slam dunk in my book. I’ll settle for 8 or 9 percent any day of the week, especially knowing it’s guaranteed money.

It won’t be so clear-cut for everyone, though. Health and age are the primary factors that will affect how attractive your internal rate of return is, with the length of term and amount of face value being factors as well. If you’re between the age of eighteen and thirty-five, in super condition, you’ll most likely get an internal rate of return approaching double-digits. You might only get a 5-7% internal rate of return, however, if you’re in your 40’s or 50’s. Again, health plays a factor too. Next, you’ll want to go with a twenty or thirty year term, as those have the best return on investment.

One excellent feature of Return of Premium Life Insurance is that currently, the taxes you’ll pay on your return of premium are 0! Uncle Sam can’t tax it because you don’t get back a dime more than you put in, meaning you didn’t actually “earn” any interest. So even if your internal rate of return is just 6%, that’s still a terrific net rate.

One more thing before we wrap this up: Don’t buy ROP unless you’re committed for the long haul. Let your policy lapse half way through the term, and you might get back 20% of your premiums in surrender value. Hold it until the end of the term, and get back 100%. Be smart and plan to hold on to this policy. Last, even if you’re not the perfect candidate to purchase term life insurance with return of premium, I’m not condemning its purchase. No matter how expensive it is, it actually costs nothing more than the time value of money, since you it’s all reimbursed, and that’s one insurance payment we can all feel comfortable paying.

AIG Life Insurance – Agent Marketing Reflections

AIG Life Insurance Company, as part of the American International Group, was the global international leader in the financial services industry. This giant has various operations in over 100 countries with additional services that include property casualty insurance, asset management services, and purchasing and underwriting subprime loans. Without the massive and controversial United States bailout, it would be in bankruptcy.

AIG has lost their coveted super high insurance ratings, where the major rating firms annually miscalculated their business practices. Now they have begun a reorganization that will constitute major selloffs while refocusing on once again becomes a dominant insurance company. Stockholders saw stock prices plummeting from its high by over 90% before now starting to stabilize.

Your big AIG question should be: Has AIG learned their lesson? Moreover, if you now or previously represented them, Have You learned your lesson?

Five things contributed to the choice of many American insurance reps to sell their insurance products to clients.

1. GREED Selling term insurance offered by AIG Life Insurance provided representatives with commission payouts often 20 to 30% higher than other major competitors.

2. SIZE Insurance representative implied to prospective clients that dealing with the largest company, meant it had to be the best. Otherwise, how could it be the largest?

3. RATINGS Many insurance reps only will sell products of the highest rated insurers. They tell themselves and clients that means financial security. Well the atomic rating bomb has exploded, injuring millions.

4. PRICE The easiest way to sell term life insurance, is to offer your prospect the lowest price on the market. Do clients buying AIG Life coverage live longer so rates are lower? Are AIG internal expenses lower, so rates are lower? (Like an expensive resort meeting in Arizona funded by American taxpayers) Do they pay their reps less? (See #1) A full combination of these would be the only way rates could be lower then competitors.

5. BUYING BUSINESS The quickest way to jump the ladder to rise upward, is for an insurance company to “buy business”. As the insurance company, you attempt to give as many clients now by whatever it takes to get more policies sold, and worry later about when claims have to be paid out. Baiting the hook was easy. Sucker in agents with higher commissions, the lowest term insurance rates, and thinking they were representing the smartest insurer out there.

AIG Life Insurance is still “buying business” today, after all the turmoil of internal problems. Watch television and you will see a closely affiliated company offering term life insurance at rates up to 70% less than others. If you somehow catch the fine print, you will see AIG mentioned as the insurer. An excellent way for AIG Life Insurance to bypass insurance representatives, and still fool consumers. A slight twist, but business as usual for them.

Selling insurance to clients should reflect the conscience of an insurance representative in recommending the right product and the right company. There are over 600 life and health insurance companies offering products in almost every state. If you are selling based highly on commission rates, company size, ratings, or price, you are probably doing a disservice to your clients.


The Best Way To Find The Most Affordable Life Insurance To Fit Your Needs

Life insurance provides financial protection for beneficiaries in the event of the insured’s death. Life insurance benefits can serve as a replacement of lost income to your family or to pay bills and final expenses. The best way to find the most affordable insurance is by understanding what types of insurance are available and what they provide for you.

Life insurance may be divided into two basic classes – Term and Permanent. Term life insurance provides life insurance coverage for a specified term of years for a specified premium. The policy does not accumulate cash value. Term is generally considered “pure” insurance, where the premium buys protection in the event of death and nothing else. There are less expensive premiums for younger people, but rates go up with age.

Permanent life insurance is life insurance that remains in force until the policy matures, unless the owner fails to pay the premium when due. The policy cannot be cancelled by the insurer for any reason except fraud in the application, and that cancellation must occur within a period of time defined by law (usually two years). Permanent insurance builds a cash value that reduces the amount at risk to the insurance company and thus the insurance expense over time.

The three basic types of permanent insurance are whole life, universal life, and endowment.
Whole life insurance provides for a level premium, and a cash value table included in the policy guaranteed by the company. The primary advantages of whole life are guaranteed death benefits, guaranteed cash values, fixed and known annual premiums, and mortality and expense charges will not reduce the cash value shown in the policy.

The primary disadvantages of whole life are premium inflexibility, and the internal rate of return in the policy may not be competitive with other savings alternatives. Riders are available that can allow one to increase the death benefit by paying additional premium. The death benefit can also be increased through the use of policy dividends.

Premiums are much higher than term insurance in the short-term, but cumulative premiums are roughly equivalent if policies are kept in force until average life expectancy. Cash value can be accessed at any time through policy “loans”. Since these loans decrease the death benefit if not paid back, payback is optional. Cash values are not paid to the beneficiary upon the death of the insured; the beneficiary receives the death benefit only.

Universal life insurance is a relatively new insurance product intended to provide permanent insurance coverage with greater flexibility in premium payment and the potential for a higher internal rate of return. A universal life policy includes a cash account. Premiums increase the cash account. Interest is paid within the policy (credited) on the account at a rate specified by the company. This rate has a guaranteed minimum but usually is higher than that minimum. Mortality charges and administrative costs are charged against (reduce) the cash account. The surrender value of the policy is the amount remaining in the cash account less applicable surrender charges, if any.

A universal life policy addresses the perceived disadvantages of whole life. Premiums are flexible. The internal rate of return is usually higher because it moves with the financial markets. Mortality costs and administrative charges are known. And cash value may be considered more easily attainable because the owner can discontinue premiums if the cash value allows it. And universal life has a more flexible death benefit because the owner can select one of two death benefit options. Option A pays the face amount at death and Option B pays the face amount plus the cash value.

But universal life has its own disadvantages, which stem primarily from its flexibility. The policy lacks the fundamental guarantee that the policy will be in force unless sufficient premiums have been paid and cash values are not guaranteed.
Endowments are policies, which mature before the normal endowment age. Endowments are considerably more expensive (in terms of annual premiums) than either whole life or universal life because the premium paying period is shortened and the endowment date is earlier. Annuities are a financial product issued by life insurance companies but are not life insurance policies.

Your insurance needs will change throughout your lifetime and your particular situation.

· Singles: Insurance needs primarily concern final expenses.

· Young parents: Insurance needs focus on family protection, income replacement and final expenses.

· Latter-stage parents: Insurance needs center on preservation of family income and lifestyle, final expenses, as well as funding for college expenses.

· Golden years: Financial and insurance needs focus on income/lifestyle protection for the surviving spouse, preservation of assets, estate distribution and final expenses.

Remember, if your life insurance policy is not doing what you need it to, you are not saving any money. Talk to a financial advisor, do your research and you will find the type of insurance that provides the benefits you need at the lowest cost.