Health Insurance

A Term Life Insurance Policy That Pays Back, Sometimes

This Christian Science Monitor column introduces a new breed of life insurance: term life insurance policy with Return of Premium (ROP) features. Unlike regular term life insurance, in which you lose all the premium if you outlive the term of the policy, in ROP policies you will get all your premium back if you survive the policy term.

As you can expect, ROP policies will be more expensive than regular term policies. In the quoted example, “[f]or a basic $500,000, 30-year term life policy a healthy 40-year-old man might pay $895 annually vs. $1,232 for one with an ROP feature.”

Is this a good deal? If you just buy the regular term life insurance for $895, and save and invest the balance of $337 ($1,232 – $895) in the stock market, you will be able to get all the premium balance of $36,960 ($1,232 * 30) after 30 years if your investment turns in 7.82% annual after-tax return. It is actually a good guaranteed return for ROP policy holders.

However, the downside is for early withdrawal, your return on premium will be significantly less(the article quoted you will get 50% premium back if you withdraw after 15 years in a 20-year policy). In addition, if you die within the term, the payout is no different from the regular term life insurance.

The article correctly concludes that “you come out ahead with ROP insurance only if you hold the policy until it expires.”

In terms of life insurance, I will only consider regular term policies. Insurance and investment are two very different activities and it does not make sense to me to get an ROP or universal life policy and have my choices limited.

Life Insurance For Your Kids: Creepy, But…

Should you purchase life insurance for your kids? There are already many personal finance articles telling you no, but Jeff Opdyke put the reasoning in the neatest way by sharing his struggle in his WSJ column.

Let me summarise some rational and/or emotional reasons below:

  1. Do you want to benefit from the death of your kid?
  2. Kids don’t produce income, so the only tangible loss is burial cost. Do you really need an insurance to cover the small cost of burial?
  3. Think insurance as a saving tool at the minimal? Life insurance for kids can hardly be an efficient saving vehicle. Try tax-advantaged 529 plans or Coverdell Education Saving Accounts for your kids’ college expenses.

To put it into perspective, Insure a company offers to provide $10,000 coverage to my 2-year old at $7.28/month (WA Grow-Up Plan). The rate is guaranteed until my kid turns to 21, and the cash value is equal or higher than the total premium paid after 20 years. Coverage can be as high as $20,000. (Yes, it is Gerber the baby face — do you know Gerber is also in the business of insurance writing?)

By simple math, I need to pay $87.36 a year for $10,000 benefit. I don’t think I will be in short of $10,000 for the rest of my life, so the insurance coverage really does not mean anything to me. Think this as saving? Is less than $100 a year enough to cover the college books, not to mention tuition?