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Todd Radwick | ‘Return of premium’ disability insurance forces saving

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Disability insurance with a “return of premium” rider (ROP for short) is a type of insurance made to protect your income if you get sick or hurt and cannot work, but where you can get a 100 percent refund of all your premiums paid, typically at age 67, if you don’t have any claims.

It’s peace of mind and protection if you need it, all your money back, a “forced savings account” if you don’t.

Having disability coverage is a very important part of planning for your future financial security and risk management. After all, according to the Council for Disability Awareness, 25 percent, 1 out of 4 will suffer a disability that keeps them out of work for at least 90 days for those in their 20s, 30s and 40s, with an average disability lasting three to five years.

But what if you are one of the 75 percentwho DON’T get disabled? You have a higher chance of nothing happening. Isn’t buying insurance just waste of money then? Why not just risk it? Having a ROP rider on your policy can cancel out this concern.

When you contemplate everything you need your income for to pay the bills, i.e. the mortgage, utility bills, groceries, gas, car loans, credit cards, health insurance premiums, risking it, not having disability insurance just doesn’t make sense. Your income is actually your greatest asset of all and should be protected.

Simply take your annual income and multiply it by the number of years you have until retirement and it’s a pretty big number. A 35-year-old person making $100,000 working for 30 years to age 65 will earn $3 million dollars, and that’s not even taking into account raises in income, and promotions.

Let’s face it, the savings rate in America is down, and a lot of people aren’t very good at saving money. I had one client who was thrilled with his plan. He had some close calls to be sure, but never actually got “disabled.” Therefore, in his case he received back $48,000, the full amount he had paid in. He ended up paying off some debts and paying cash to take his wife on an extended cruise in the Caribbean. He commented, ne never would have seen this money had he been required to save it on his own.

How does it work? First, you get a disability insurance policy, either short term or long term to fit your needs for protection. Then you add the “ROP” rider for an extra premium.

What do these policies cost? Let’s look at an example.

A 35 year old male, non-tobacco user can get a long term disability insurance policy with a top company for about $36 per month that will pay him $2,000 per month in tax-free disability benefits all the way to age 67. The maximum that could be paid out, assuming this person got totally disabled right after buying the policy would be $768,000. Then we add the ROP rider for an additional $18 per month, bringing us up to a total of $54 per month. The total premiums paid for 32 years to age 67 would be $20,736. If there are no claims, this person would then receive a full refund, a “return of their premium,” of $20,736.

From an IRS standpoint, this return of premium is also tax-free because it is considered to be a return of pure basis/principal without interest.

However, there is what we call “inferred interest.” For example, if we only go with the plain vanilla policy, without adding the ROP rider, we’d only be putting out $36 per month. That means we could then invest the cost of the ROP rider, $18 per month on our own, right? The question then becomes, what rate of return would be required on the extra $18 per month, in order to have it equal the $20,736 in 32 years. The interest rate on this might be higher than you think. You would need a guaranteed, net after-tax return of 6 percent, which gross before taxes might be 8 percent, depending on your situation.

In cases where there IS a claim, the company simply deducts the amount of the claim from the premiums paid, and the insured gets back any premiums paid at the end of the policy, typically, age 67.

These policies do have caveats however. First, you need to apply for and get a policy, and pay for it and put it force. Policies pay, proposals don’t. Be advised because the risks of getting disabled are so high, much in part to superior great medical technology, much higher than dying prematurely in fact, companies are very particular about underwriting and they don’t just hand these out. In fact, according to the National Safety Council, you are 240 times more likely to become disabled from an accident than to suffer a fatal one. Where there are over 1,000 companies selling life insurance, there are only about 11 selling disability insurance. It is a seller’s market – not a buyer’s one to be clear.

One other caveat is that you need to keep the policy to age 65 to get the full return of premium. Prior to that, there are vesting schedules in place to discourage people from getting a policy, then quitting early. In fact, for the first four to five years, there may not be any return of premium.

This type of policy with a ROP rider is best designed for the person who recognizes they are human and not invincible, and that the risk of getting disabled is a real part of life and that their income and all that it pays for is worth protecting during their working years until retirement. But it’s also for the person who is optimistic about their odds of not getting disabled because they live safely, make good decisions, care about their health, etc., and they are reasonably confident they will get all their money back with little to no claims.


Todd Radwick, president of Radwick Financial Group LLC, of Winthrop Wash., is an insurance and financial adviser and 23 year industry veteran. He can be reached at 509-996-3425 or through his website at www.radwickfinancial.com todd@radwickfinancial.com