Term insurance, as the industry has always known it, is life insurance that is pure protection. A client doesn’t pay for cash values–just the promise of a death benefit.
In the last decade, term insurance rates in the United States have dropped dramatically as a result of significant competition between carriers. Today, competitive term rates are a must if an insurer is to remain the company of choice for brokerage distribution and career companies.
At the same time, consumers are struggling with saving and with decisions about where and how to spend their hard earned dollars to plan for the future. Nobody likes spending money on something they hope they never have to use. That’s one reason why people hesitate to purchase life insurance.
So, when faced with the dynamic of commodity product plus consumer hesitancy, insurance companies have to find creative solutions that meet the needs of producers and consumers.
That’s also why a number of companies are now offering a life insurance policy that can reward the client for staying alive.
A life insurance policy that offers a return of the premiums can provide the best of both worlds when it comes to affordability and flexibility–the customer gets valuable death benefit protection plus a surprising money-back guarantee.
Who might appreciate a product like this? Here are some examples of scenarios where a term policy that returns the premiums might fill a need that a regular term policy could not:
o A business owner who wants to insure a key employee and use the premium refund benefit as a retirement bonus.
o A homeowner who refinances and has a future balloon payment.
o A divorcee who is required to purchase life insurance as part of a court decree.
The situations where a return of premium term policy can appeal to consumers have a few common characteristics. They are:
o A temporary need where the need or obligation will end at a predictable time.
o People with the health confidence that they will be alive when the premium refund benefit is payable.
o A need where “forced” savings is appealing.
The advantage of this type of product is that it can provide both a death benefit that’s payable while the coverage is in force and a “living benefit” in the form of a full premium refund if the insured outlives the initial protection period.
Coverage can often continue after the premium refund benefit, but usually at higher and increasing rates.
The terms and conditions of receiving the premiums back vary by the policy and the insurance company. Not all of the premiums may be returned.
Assume a client is in a similar situation to one of the situations mentioned above, and the client has a need for life insurance protection. What can a return of premium policy do in this case? It can:
o Provide necessary protection–first and foremost, life insurance will provide a payout upon the death of the insured.
o Provide cash value–a policy like this can build some cash value before the end of the level period. With some policies, the cash value can be accessed via loans for emergencies or other reasons. But keep in mind, depending on the policy, loans and interest will reduce the death benefit and the ultimate premium returned.
o Create money for when it is needed– the premiums returned could be used to fund expected expenses down the road such as offsetting college education, a child’s wedding, additional retirement income or savings, paying down credit card debt or a mortgage, a major purchase or special vacation, offsetting the cost of medical coverage or care, if needed.
Of course, the right type of insurance will depend on the clients’ particular situation. This becomes apparent only after some discussion.
Some advisors may feel that although term policies that can return premiums generally have lower premiums than permanent plans; the premiums are too high for term coverage.
However, for some clients pure death benefit protection is not the right solution, and a moderately higher price is not a deterrent. Under those circumstances, the combination of a valuable death benefit and a valuable living benefit may make a return of premium term policy a good option to present to the client.
Hank Ramsey is vice president-product management in the individual life insurance business at The Prudential Insurance Company of America, Newark, N.J. His email address is email@example.com.