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Return of Premium life insurance policies are an appealing option to many people. However, a statutory change taking place in 2010 drastically changes the way Return of Premium life insurance policies currently work. There are pros and cons to the changes that are on the horizon.
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With typical life insurance policies, there is no such thing as a refund of your premiums. If you die before your policy expires, then your beneficiaries receive the payout benefit. If you die after your policy expires, then the insurance company keeps your premiums and you receive no benefit.
As an alternative to traditional whole life insurance policies and term life insurance policies, some life insurance companies offer a life insurance product called Return of Premium Life Insurance. Just as the name indicates, Return of Premium Life Insurance products, known as ROPs, refund your premiums if you outlive your policy.
The Advantages of Return of Premium Life Insurance
Obviously, the biggest advantage to a Return of Premium life insurance policy is the return of your premiums if you live longer than the term of your policy. If you have a regular term life insurance policy, say for 20 years, and you don’t die within that 20 year time frame then your policy simply expires and your premiums stay with the insurance company. With an ROP, if you survive beyond the 20 year term, then all of your premiums are refunded to you.
Another benefit to this type of insurance policy is that the money you receive from the refund is tax free. On a technicality, if you survive beyond the term and qualify for a refund, then the money you receive back is simply a refund of your money, which can’t be taxed.
The Disadvantages of Return of Premium Life Insurance
While there are some major advantages to the Return of Premium Life Insurance option, there are disadvantages, too. One of the biggest disadvantages is the cost of the ROP. Since the insurance company is guaranteeing you a refund of your premiums, they charge you more money for the policy. This is so they have extra money to invest in order to earn a larger profit in the event they do need to refund your money.
Another disadvantage to the ROP is the wide range of differences in the terms and conditions of each policy. There are very few federal guidelines to how an ROP works, and therefore the policies can vary widely from one insurance company to the next.
For example, one insurance company may offer you a prorated refund for early termination. Another insurance company may not offer a refund at all if you terminate early. There is no consistency.
Since there is no consistency, not all states approve of the selling of ROPs. Therefore, another problem exists if you want to buy a Return of Premium life insurance policy but you live in a state that does not allow it.
The Changes Coming to Return of Premium Life Insurance
Starting in January of 2010, there was a regulatory change called Actuarial Guideline 45. With this change, stricter regulations will mandate more uniform conditions for all ROPs.
The change brings about good news and bad news for ROP policy holders and insurance companies alike. With the new guideline, ROP policies will be required to refund a percentage of premiums for early termination.
This is good news for the policy holders with the exception that insurance companies will most likely raise their rates as a result. Some insurance companies will stop selling Return of Premium Life Insurance products altogether.
Once the new rules are in place, states who currently disallow the selling of ROPs will most likely allow them. This opens up the opportunity for people who are interested in buying a Return of Premium life insurance policy to be able to get one in states they previously couldn’t.
However, before you buy a ROP you need to decide if the investment is really cost effective for your lifestyle. Some people think a ROP is a good option for people who have difficulty putting money aside regularly for retirement. Other people think a ROP is more costly than investing in mutual funds directly. Then there is also the argument that mutual funds are more risky of an investment whereas the life insurance policy is guaranteed.
Before you invest in a ROP it is a good idea to shop around and compare rates and terms. Get free life insurance quotes now when you enter your zip code in the quote tool provided on this site.