Why Refundable Term Life Insurance may not be a Viable Insurance Alternative

Quite a number of persons do not like the idea of term insurance. This is usually because clients are uncomfortable with not benefiting from this plan while the are alive. Some ever-thinking insurers introduced a refundable term plan to increase options for consumers. A refundable term (RT) plan ensures that if the insured survives the coverage period, all premiums would be refunded. A particular refundable term plan refunds only premiums paid without interest. Based on careful assessment, it seems as though refundable term insurance is scandalous at best.

The actual cost of the refundable term plan is too steep. In some cases, the premium for a certain amount of coverage would be similar to the basic premium of a Universal Life plan when compared to it. The basic premium in a Universal Life plan is the part of the overall premium that covers the cost of the insurance. In one example, the basic premium for $1,000,000.00 in coverage is $886.00 per month. The premium for the Refundable Term to 65 is $710.97, all other things being equal. That amount is too much to pay for temporary insurance.

The opportunity cost of refundable term is quite significant. This means that the opportunity lost by taking this type of plan may be more valuable than the refundable term plan itself. If you are taking a term plan it is best to take the non-refundable type. The difference in the premium between the two can be very significant. The premium for RT in the aforementioned example is $710.97 monthly. The non-refundable plan for the same period costs $355.85. Assuming that you invest the difference in premiums at 6% per annum, the money you would save is astonishing. With the RT, at age 65 you would be refunded $298,607.00. If you took the non-refundable term and invested the difference, you would have $680,752.00. The opportunity cost of the RT can be estimated at $382,145.00. It can be even higher if you are a savvy investor.

It is better to take the non-refundable option even though it may seem as if your dollars might be wasted. Apart from that being a fallacy, you would lose the opportunity to accumulate much more if you take the refundable term plan. In the same manner, any rider that offers a refund of premium, if the plan is not used, should be viewed with suspicion. You would usually accumulate more savings if you saved the premium difference in an interest-bearing account.

With insurance in general, it is best not to think in terms of “using” the plans for two reasons. The first is that insurance is meant to protect against financially debilitating occurrences and not for events or expenses that you could comfortably cover. The second is that doing this would increase your premium unnecessarily and prevent you from maximising your savings. If offered a refundable term plan, you should politely refuse.