A term policy that pays back, sometimes

When it comes to choosing life insurance, consumers have been historically given two options: term or permanent.

Each has its drawbacks. Although term is generally cheaper, it has no cash value. The only way to collect is to die during the term. Permanent has an investment component, but this type of insurance is often viewed as too costly and complex.

So, in the past few years, the insurance industry has rolled out a new product for those who view term insurance as money down the drain. It's called Return of Premium (ROP) or Money-Back Term, and it's one of the hottest products on the market, according to AccuQuote, an insurance brokerage in Wheeling, Ill.

"It's a great option for many of our customers," says Byron Udell, chief executive officer of AccuQuote. "The price is so much less than permanent insurance and not that much more than term life. And people don't feel like they're throwing their money away."

In fact, ROPs give policyholders the benefits of standard term insurance, but gives them all their money back if they're still alive at the end of the 15-, 20-, or 30-year term of the policy.

But there are several catches.

ROP policies cost more than traditional term life insurance. For a basic $500,000, 30-year term life policy a healthy 40-year-old man might pay $895 annually vs. $1,232 for one with an ROP feature. Shorter ROP policies cost considerably more - sometimes six or seven times as much as simple term.

In addition, you come out ahead with ROP insurance only if you hold the policy until it expires.

If you decide to surrender the policy within the first five years, don't expect to get a dime back. People who drop the policy at year 15 of a 20-year policy can expect to get back about 50 percent of their money.

"Companies count on a certain number of people dropping these policies to pay for those who don't," says James Hunt, a life-insurance actuary in Concord, N.H. "Most buyers of term life policies drop the policies before they mature."

Despite the drawbacks, ROPs are gaining in popularity and more insurance companies are offering the policies. Fidelity and Guaranty Life Insurance Co. launched an ROP term product in 2001. AIG American General Life & Accident Insurance followed in 2002 and is now the biggest player in the field. Aegon, N.V., United of Omaha Life Insurance, and Federal Kemper Life Assurance have also joined the field.

"We're not offering this product yet, but we're looking into it," says Dick Luedke, a spokesman for State Farm Insurance in Bloomington, Ill.

Obviously, an ROP policy does not make sense for everyone and a "sit-down" with a life insurance planner may be in order - especially for those nearing retirement. Given the length of terms available for an ROP, if you're above the age of 55, an ROP policy is probably not the right product for you, say experts. If you anticipate canceling the policy before the policy matures, an ROP wouldn't be a wise option. And if you believe you could earn more by buying a cheaper term policy and investing the savings, a regular term insurance policy may be the way to go.

"I think ROPs are a bad idea," says Mary Malgoire, a certified financial planner in Bethesda, Md. "You should just pay what the insurance costs and not a cent more. That extra money that you're spending on an ROP could instead be invested wisely."

But for someone looking for a conservative investment, an ROP could make sense.

In the above example, after 30 years, the policyholder would be refunded $36,960. To receive that lump sum by investing the additional $337 premium in stocks and bonds, the policyholder would need an average rate of return of about 8 percent a year. In addition, that lump sum is tax-free because you're just getting back your own money.

"For some clients, it represents a good value for the money," says Matthew Treskovich, an insurance broker in Oviedo, Fla. "And it's becoming even more popular among my clients as the cost of the policies has been lowered in the past few months. They view ROPs as a win-win situation: term life insurance with a money-back guarantee."