Term Life Insurance Return of Premium vs. Roth IRA
Original post by Jacquelyn Jeanty of Demand Media
Insurance and investment products accomplish similar tasks in terms of protecting a person’s assets, though their overall purposes differ. When comparing a Roth IRA with term life return of premium insurance, one product focuses on investment gains while the other works to insure a person’s income in the event of his death. When deciding between the two, a person’s individual needs and goals will determine which product will work best.
Investment vs. Insurance
Life insurance products vary in cost, benefits and policy conditions. Term insurance with return of premium offers a mix of features found in both whole life and standard term life coverage. The return of premium feature makes term life coverage comparable to the savings component found in whole life coverage. A Roth IRA functions solely as an investment product that offers a tax-free earnings component. And while both products have a tax-sheltering effect, someone looking for an investment option may favor a Roth IRA while someone looking for a combination of insurance and investment benefits may opt for a term insurance return of premium policy. (See References 1 and 2)
Return of Premium
With a standard term life policy, policyholders pay premiums for the length of the policy term and forfeit any premiums paid. With return of premium coverage, policyholders receive a payout regardless of whether they outlive the term or not. So, someone who purchases a standard 20-year term policy will lose all of the premium monies paid unless death occurs, whereas a return of premium policyholder will receive a payout no matter what. As with whole life coverage, any monies invested in a term insurance return of premium policy remain sheltered from taxation, so policyholders receive a full return on premium payments made.
Roth IRAs—also known as Roth Individual Retirement Accounts—provide a vehicle for savings and earnings as opposed to the savings and insurance features found in a term life return of premium policy. Unlike return of premium policies, account holders can withdraw monies from a Roth IRA account at will. Withdrawals made after the age of 59-1/2 remain tax-free, according to the Tax Guide for Investors reference site. Early withdrawals become subject to taxes and possible penalty fees depending on the terms of the contract. Since after tax-dollars fund both Roth IRAs and term insurance return of premium policies, account holders cannot deduct contributions or premiums made when filing income taxes.
Return on Investment
Both Roth IRAs and term insurance return of premium policies offer a return on investment, though the types of returns differ considerably. With return of premium policies, the life insurance coverage provided becomes a cost-free benefit when policyholder’s outlive the policy term. On the other hand, return of premium policies can cost as much as 50 percent more than standard term life coverage, according to Insure.com, an insurance products reference site. In effect, the insurance company invests this extra money and benefits from the interest earnings, which enables the company to pay back premiums to eligible policyholders. As Roth IRAs function solely as investment vehicles, the accountholder benefits from all interest earnings made and not the issuing insurance company. Ultimately, it comes down to a person’s individual priorities in terms of whether a product provides insurance protection and savings features or savings and investment features.
- Insure.com: The Basics of Return of Premium Term Life Insurance; August 5, 2009
- SmartMoney: Which Life Insurance is Best?; S. L. Bradford; February 9, 2005
- Tax Guide for Investors: Roth IRA 101
About the Author
Jacquelyn Jeanty has worked as a freelance writer since 2008. Her work appears at various websites. Her specialty areas include health, home and garden, Christianity and personal development. Jeanty holds a Bachelor of Arts in psychology from Purdue University.