Term Life Insurance with ROP: Is it worth it and why?

My financial advisor (at ING) recommended that I get a Term with ROP life insurance policy. So, I did the math and decided to share some details with you.

From what I can tell, I could simply get term life insurance without a ROP rider and invest the difference. Assuming even marginal returns, I would easily out perform the return on premium.

More importantly, if I were to die and the policy is paid out, my wife wouldn’t get the additional I’ve paid into the policy to get the return on premium rider. But, if I were to invest that money and buy term life insurance my wife would receive a policy payout in the event of my death plus the investment would be safe.

When you put it that way, it seems like a no brainer to not go with a ROP rider.

The objections a insurance product broker will raise will fall along these lines:

  • First, there is an expression in the insurance business: “buy the term and blow the difference.” The reason is that at the end of the day while most people will say, ‘I’ll get the cheapest policy and invest or save the rest,’ yet they will see that extra $100 or so and put it to a night out on the town or, put it towards some other expense (even an emergency expense like car repairs). It is a device for forced savings for those that may lack the time or discipline to manage where the excess ‘premium’ goes.
  • Some brokers will tell you that you would need to locate a fund that returns 5% to hedge inflation AND beat out the tax implication (either now, for a ROTH, or later, for a traditional investment). They’ll say that IF inflation is 60% after 25 years, 40% of premium still beats 0% on a traditional term policy.
  • They’ll tell you that this is a guaranteed return of every dollar put in, and, BEING A RETURN OF PREMIUM, it is not taxed at the end. Premiums or original cash value on life insurance policies is never taxed; you already payed it. The excess ‘premium’ you disciplined yourself to allocate elsewhere WILL be taxed, either at income or capital gains rates.
  • They’ll also tell you they’ve done the math better than you have, saying something like: “From our analysis, given your age (the likelihood that you’ll live to collect the RoP) and moderate risk tolerance (again you have to beat 5%), the RoP fits your plan.”

Don’t listen to any of this! At the end of the day, the only thing that matters is that a ROP rider adds about 40% to the cost of term life insurance and if you were to die during the term of your policy, you don’t get a single penny back. That’s why it’s a bad deal, because you lose the extra you’ve paid in to ROP. How else would the insurance company make money on this? They have to make money somewhere.

Follow the advice of numerous investors, and even Dave Ramsey himself when he says “buy term and invest the difference.”