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I currently have a Return on Premium (RoP) life insurance policy. I've already got $3,500 paid into the policy, and another 26yrs till the policy pays out.

I'm currently paying $72/month. The reason for the question is I just got a quote from another insurance company which is offering me the same 30yr RoP policy but for just $49/month. So I'd save $23/month.

If I was to swap to this new company, I would lose the $3,500 that I have in my current policy. Over the course of the next 30yrs I'd hold onto $8,280.

For the purposes of comparison, let's say that I'm going to buy a $23 bond each month, timed to payout as close to the end of 30yrs as possible. I've looked up the bond rates for today:

  • 1mo: 0.25%
  • 3mo: 0.35%
  • 6mo: 0.48%
  • 1yr: 0.66%
  • 2yr: 0.84%
  • 3yr: 0.98%
  • 4yr: 1.26%
  • 5yr: 1.55%
  • 10yr: 1.76%
  • 20yr: 2.17%
  • 30yr: 2.50%

Will my interest cover the forfeited premiums, if not what rate would be required?

EDIT: I've been asked to post more information (I'm 35 years old. And the life insurance is for $250,000.) Just to try to steer the flow of answers, my interest is not in a comparison of RoP to term or other options but whether the forfeiture of my current premiums is warranted.

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Its difficult to answer questions about financial efficiency when not all options are considered.

If it was me, I'd buy term, which will run you about 18/month and less if you did it on a yearly basis. For 26 years this would cost you 5616 in total.

If you invested the difference in an S&P 500 fund you would end up with over 60K after the 26 years. Much better than your current policy will pay about 25K.

Plus if you do die within that time, your heirs will only get the face value under your current plan. With the new plan they get the face value and investment account.

As a general rule, allowing insurance companies to handle your investments is a bad idea. What they are doing in a RoP plan is having you pay extra premiums in order to invest it and return it to you (at zero growth).

Insurance companies must invest very conservative and have a high infrastructure cost. This is why they are able to offer you zero growth on your 'investment'. Heck you would be better off sticking it in a bank account.

Edit: If you stick with your original plan, you will get 72*12*30 or about 26K. If you go with the term plan, you'll end up with 60K in 26 years all while "paying the same amount". Pick the bigger number.

You can run a similar comparison on the new plan, it will also stink compared to buying term and investing the difference.

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    This doesn't help with calculating what is best to do now that the mistake has been made. – Nathan L Oct 21 '16 at 17:23
  • More explicitly explained. – Pete B. Oct 21 '16 at 18:47

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