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Return of Premium And Convertible Term Life Insurance Can Secure Retirements

By Mike Heuer

Some term life plans have options for conversion into whole life policies or for a return of premiums paid. A return of premium term life insurance plan can result in a large nest egg while providing life insurance protection for a period of time. Both plans can help when there are changes in the basic family structure.

For example, a $1 million policy might cost about $10,000 annually for a 30-year term. And if the named insured outlives that 30-year period, a lump-sum return of premium could result in a $300,000 payout after deducting fees and maintenance costs over the life of the contract. And that makes for a nice investment for retirement years while at the same time providing a high level of life insurance protection.

Most insurers offer such plans for 20- to 30-year periods with coverage amounts usually starting at $100,000. Such plans are best used for ensuring a home mortgage, college tuition or home equity loan are protected against the possibility of a family’s primary bread-winner dying suddenly and leaving financial obligations. Premiums are level, meaning they never change during the period for which insurance is in force.

Some insurers offer types that can build cash value against which loans can be drawn, and others might offer policies in which all premiums are returned minus fees and maintenance costs. That means nearly every dollar put into the policy is returned.

One of the best aspects of getting the rates paid on the policies returned is the fact the proceeds are tax-free. That means a tidy sum can be paid to the policyholder if the named insured outlives the term, making for sound retirement investing. And because some plans actually grow cash value, they can provide a nice return on the investment.

Return of Premium Term Life Insurance plans can work well in the event of a divorce. Sometimes during divorce proceedings, one party will be required to purchase life insurance protection to ensure the former spouse and any dependents do not suffer a sudden drop in income due to a loss of alimony or other court-ordered payments if the primary earner should die. In such cases, returning premiums makes the most sense for the individual required to buy the insurance protection.

In most cases, a change in family structure is the primary reason someone might want to change a convertible term life insurance plan into whole life insurance. Other reasons might include taking on a large home mortgage or possibly entering into a business venture and wanting to ensure a financial legacy will be left to coverage living costs as well as create nest egg that can be left for children and surviving spouses.

When carrying a term life policy, there usually is an option for convertible term life insurance, which converts the plan into a whole life insurance policy. But the need for cash value can be a problem if converting a term life plan into a whole life policy. Because the term life plan does not grow cash value while paying premiums, the need for rapid cash-value growth will necessitate higher monthly premiums to catch up, and that can be a costly solution.