Why is it necessary for a person to get a life insurance? The whole purpose of a life insurance is to ‘insure’ or guarantee to the insured that upon his or her death a certain amount of money will be given to a designated person or persons (known as beneficiaries). These beneficiaries are dependent to the insured and most of the time it’s the family. This is a financial security for the dependents from the financial loss (income) when the insured passes away.
Nowadays, life insurance has also become a means to invest and save. There are two known types of contracts: term life insurance and whole life insurance. Term insurance gives protection only for a specific number of years while whole insurance spans the entire life. There is one unique type that falls under the term insurance, and that is the ‘return of premium term life insurance.
This policy is thought to be too good to be true to exist, but it does. What this does is refund the money after the coverage is over. For example, you paid $10,000 for a policy that will end in a span of ten years then when ten years is over and you’re still living you will be paid back the $10,000 plus the coverage amount agreed upon. Note that this should not be confused with policy called return of premium life insurance.
You may think that the insurance company will not be able to make profit with this kind of set up, but it actually does. This is possible because of the idea that the value of money in the present is worth more than the value of the same amount of money in the future – this is called time value of money. Money today can be invested and earn interest, and that’s what insurance companies do – earn investment income on premiums until the end of the coverage. In other words, they are able to profit because they use your money (and money of others) for other investments. So, they basically pay the operating expenses and payouts to beneficiaries, and the rest is invested. Their earnings or profits from investments are huge enough that they are able to return the initial premium plus coverage amount agreed on.
Return of premium term life insurance is ideal for those who want to save and earn. If it happens that the policy is surrendered before the coverage is completed, sometimes a portion of the premium will be returned to the policy owner.
Source: FinancialPlanningTips.net
