For consumers who are building a family and have invested in their dream home, purchasing Term Life Insurance to pay off the mortgage if a breadwinner dies makes a lot of sense. If you are under 50 and in good health, Term Life insurance is the most affordable product to fund your Mortgage Protection Plan. The last thing you want to happen is for your survivors to lose their dream home because they cannot keep up with the mortgage payments. You know the proper thing to do is to leave enough money behind to pay off that mortgage.
Premium down the Drain?
You understand that term insurance is remarkably affordable, but still have the nagging feeling that your premium dollars have been washed down the drain if you outlive the policy. The reason term insurance is so affordable is because insurers rarely have to pay claims in the first place, at least not as often as with Universal or Whole Life. On top of that, most term policyholders convert or replace their term insurance with permanent insurance within the first three years. It is logical, however, that a homeowner not purchase a permanent insurance product to cover a mortgage that lasts thirty years or less. So, how do you eliminate the “down the drain” issue that continues to linger?
Return of Premium Rider
Insurance companies continue to design options for their products that will separate them from their competition. Simply put, this is how great products become even greater. Today, many insurers are offering Return of Premium Insurance or the Return of Premium Rider. If you select the rider, the insurance company is going to charge an additional premium for the rider. The company then takes the additional premium and invests it so that enough interest is earned to allow them to refund all of your premiums paid during the term of your policy; as long as you outlive the policy. Some insurers will even pay a portion of the premium if you cancel the policy in the later years of the term. Since the refund is considered a return of premium transaction, there are no tax consequences for the policyholder.
Invest the returned funds into a Retirement Vehicle
By now you’ve probably figured out why the Term Policy can become an investment in your retirement, and this is where you will also understand how your monthly premiums for the term policy are significantly lowered over time.
Once you’ve reached the end of the policy term, you will then take the returned premium and invest it in a favorable annuity product that will then pay regular periodic retirement payments for the rest of your life. Since those entire premium dollars were paid using the after-tax money, you can invest 100% of the returned premium which puts all that money back to work for you. Another bonus to consider at this point in your life, your mortgage has been paid in full, and your dream home just became an additional vehicle to fund your retirement plan.
The long-term cost of the Term Insurance
When you are about ten years into your retirement, you will likely have an epiphany of how much value that inexpensive term insurance policy really brought to the table:
o For thirty years, you provided the protection needed to make certain that your loved ones could pay off the mortgage in the event of your death.
o By outliving the term policy, you were able to invest about $25,000 in an annuity that will accumulate interest over time and pay that money back to you during your retirement.
o Although your return of premium did not include interest, the premium was reinvested in an annuity that will earn interest.
o You did not pay taxes on the returned premium or when the premium was returned a second time through the retirement distribution.
Taking these points into consideration, you may conclude that the Term Insurance used to protect your mortgage only cost you the amount that was charged for the rider, which was about 40%, of an already very affordable premium.