Life insurance is a necessary part of any financial plan. It protects against the pure risks (risks which associate only with loss and no chance of gain) associated with the life of an insured. Usually, this insured has those who are financially dependent upon him or her. Sometimes, these dependents can be people; other times, it can be a business insuring a key employee.
The two categories of life insurance: term life insurance vs whole life insurance. Among the types of term life insurance, there is one we should discuss in particular called “return of premium term life insurance.”
Return of premium term life insurance is a unique one in that the insurer completely refunds the money paid after the term of coverage is over. These policies are of course different than a return of premium life insurance policy (not a term policy). So, if you paid $10,000 for a 10 year policy with a coverage amount to your liking, you would receive this $10,000 back after the then years expired, provided the insured is was still living.
Many think this is too good to be true, but in reality it does exist. Not only does it exist, but it is very common. Insurance companies are still able to make plenty profit on this setup. Any finance course will quickly show you that the time value of money makes the money in the future worth less that the same amount of money in the present.
Since many are not aware of the time value of money, they believe that they are getting “free” insurance. What they fail to realize is that their funds would be greater in the future than today even from the paltry earnings of a savings account, and they also fail to realize that inflation will be eating up a lot of this money; therefore, the dollars they receive later will not be worth quite as much as they are today.
The insurance company pays for its operating expenses, pays it payouts to beneficiaries, and invests the rest. The investment earnings bring back enough to have the insurance company still able to profit while still giving you back your initial premium.
Return of premium term life insurance policies are good for people who really need that money back, and who just cannot afford it otherwise. Sometimes, too, when the policy is surrendered only part way through, a portion of the premium will be given back to the policy owner – whether guaranteed acceptance life insurance, or not.
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