Disability Insurance Feature – Return of Premium
I’ve been getting quotes for own occupation disability insurance from various insurance agents and they all promote the “return of premium” feature as being the best thing since sliced bread. Whenever a sales person promotes a product aggressively, my suspicion sensor trips and sets off an alarm. In my experience, heavily promoted financial products are usually a better deal for the sales person than for the consumer. Back to the task at hand, is return of premium worth the extra monthly charge? Lets start off with the basics.
What is Return of Premium (ROP)?
Return of Premium is where you pay an extra fee / month for the “potential” of getting some money back after x amount of years. In my case, I would get 50% of my premiums returned to me in 7 years providing that no claims are made.
Say that instead of purchasing the ROP, we invested the amount instead. Below is a table consisting of the premium payback that I was quoted, the payback after inflation, and the invested payback if we were to put the money into the markets instead.
- 2.5% inflation.
- 2.5% return on the markets after inflation and taxes.
- 0.25% return on the savings account after inflation and taxes.
- The cost of the ROP is $276.07/year or $25.05/month. Lets assume that I’m frugal and I pay the annual “value” price.
Table: Return of Premium vs Investing
|Year||Premium Payback||Premium Payback After Inflation||Invested Payback||Savings Account|
Judging from the table (and my assumptions), it appears that the return of premium payout does not justify the annual fee.
If (and only if) no claims were made over the 37 years of disability premiums, the ROP would pay a total of $9829.17 after inflation. If we were to invest the annual fee instead, returning 2.5 % after inflation and taxes, we would end up with $12,950, a difference of $3,120.83 in today’s dollars. In fact, if the money was simply put into a savings account returning only 0.25% after inflation and taxes, the savings account would come out ahead by $2,140.83.
To put the final nail in the coffin, a factor not accounted for in the table is the “risk” taken when purchasing the return of premium as it assumes no claims are made. If a claim is made, it would would result in a $0 payback!
My conclusion? Instead of ROP, it should be called RIP (off). Before accepting any “extra features” on insurance products, or any product for that matter, make sure to run the numbers first.