Debating 'money back' insurance policies

Q: I agree with your advice to buy pure term life insurance, because it allows people to buy a lot of death protection for very little money.

Recently, I have been talking with an agent about a new type of term insurance that offers a money-back guarantee.

I can buy the term coverage and if I'm still alive at the end of the selected period, I get all my money back.

This sounds like a great new product, and I'm leaning toward purchasing a policy.

The 20-year coverage period is actually cheaper than the 15-year period, so I will probably purchase the 20-year coverage. I'll pay less and get about the same amount back as the 15-year policy and have five more years of coverage.

Is there a catch to these policies that I am missing?

A: If you like the idea of combining a forced savings plan with a moderate-to-low return with your term life policy, this might be just the right type of coverage for you.

If you prefer more flexibility and the potential of higher rates of return on your investment, you would be better off buying straight term and investing the difference on your own.

For comparison purposes, I requested quotes for 15- and 20-year term life policies from two highly rated insurance companies: One for straight term coverage and another for a "money back" term policy.

For a healthy, nonsmoking 51-year-old female, the 15-year straight term policy's annual premium would be $310, and the 20-year coverage would cost $422.50. The annual premium for a 15-year money-back policy would be $1,809.50, and a 20-year policy would cost $1,315.20.

If I bought the straight term and invested the difference in the premium, each year receiving a 4 percent rate of return, I would have the same or slightly more money than the money-back policy at the end of the selected period.

If I received a 10 percent average rate of return over a 15-year period, I would have $47,642 in my account, compared with $27,143 in the money- back policy. Over a 20-year period, I would have $51,129 in my account, compared with the $26,304 in the money-back policy.

If straight term insurance is purchased and no longer needed, it can be canceled at any time. You lose the premiums paid for past coverage but are able to discontinue future premiums.

The money-back policies require you to keep these in force for the entire coverage period to receive return of premiums paid.

Care to bet that insurance companies know the odds of people keeping a term policy in force for the entire 20-year coverage period is low?

I'll bet they do, and that would explain the lower rate for the 20-year policy.

Straight term insurance is the best option for most people. There is no cash buildup, but it is inexpensive.

Straight term insurance provides the protection you need at the lowest cost. Any money you have left after paying the lower premium should be invested toward retirement, college education, mortgage reduction and other financial goals.

Annual renewable term at five-, 10-, 15-, 20- and 30-year level premium and death-benefit term and decreasing term are the main types of term coverage.

I prefer the level premium term policies. You might pay a bit more in the early policy years, but you gain peace of mind. There is no worry about future medical underwriting, and you know what to budget.