Long Term Disability Insurance - Refund of Premium Rider
My spouse and I have been researching long term disability insurance for him, and we’re coming close to a decision. We ended up doing one online quote through Guardian, and then meeting with agents from MetLife and Principal (our Allstate agent writes long term disability policies through Principal). In the end, we’ve decided to go with MetLife, basically because their premiums are about 15% lower than the other two companies for practically identical policies. This seems to be because of how my spouse’s occupation is classified in terms of risk by the three companies. While Principal and Guardian classify my spouse’s disability occupational class (basically, how much risk they’re taken on based on his occupation) as 4A, MetLife has broken down 4A into even lower risk classes, 5A and 6A, and my spouse is in 6A. The higher the number, the lower the risk, so the better the premium.
Now that we’ve decided on that, MetLife also offers a rather interesting optional coverage that at first I was totally against, but now have started to ponder a little bit. It is called a Refund of Premium Rider, and basically for every five years that you do not have any disability claims, MetLife will refund to you 50% of the premiums that you paid in that five years. it sounds good on the surface, but of course there’s a catch. The rider costs a significant amount. The insurance itself and all the riders we chose to add besides this one brings the total cost to $797.98 per year. Adding the Refund of Premium Rider brings the total cost per year to $1300.71, which is a $502.73 increase per year for that rider. However, if we didn’t have a claim for five years, we would get a refund of $3251.78 based on this year’s pricing, which is $738.13 more than we pay for the rider itself for five years.
When I first looked at it, it seemed like you paid half your premium just for the rider, but really the rider is about 40% of the total premium (if you choose to add it). Obviously if you have a claim, then you ended up paying a lot more for your coverage than you needed to, but it resets every five years, so it is a short term type of risk.
Honestly, we haven’t decided. We’re both leaning towards no, and just getting the standard disability insurance we were looking at in the first place, but this has me thinking. I don’t need a forced savings plan, but I would like a 20% return on my money every 5 years (investing $500 a year in this rider and then getting $650 back per year every five years). But maybe I’m looking at it too simplistically. Of course there is risk involved, but there is always risk in everything.
What do you think? What would you do? Which sounds like the better option to you?
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July 17th, 2008 at 7:47 am
That’s an interesting option.
I’d probably lean towards opting out for now, and then maybe reconsidering it in the future once debts are totally paid.
Netting $738 is a cool idea, but that only amounts to $150 gain per year for five years. To me, that amount is so small that it’s not worth tying up an extra $500 per year for five years.
July 17th, 2008 at 8:29 am
I agree - take the $40+ per month saved and put it towards debt.
Or put your own “rider” on the account, and stash that money in the bank. You’ll net $2,585 after five years guaranteed ($40/month at 3%), whether you need to use the policy or not.
We considered a return of premium rider on our life insurance. It seems like a good idea; we were prepared for the worst, but betting that it wouldn’t happen. Then we found out that it doubled our combined premiums from $450 to $950. No thanks!
Someone once told me insurance is insurance, and only that… not an investment. It buys us peace of mind and security, and is well worth the cost.
July 17th, 2008 at 9:34 am
I have disability insurance and I have filed a claim. I’m a massage therapist and I own my own business. If I get injured or ill–guess what? There is no working from home or toughing through it. I only get paid when I’m hands-on with a client and therefore needed something to cover myself. The insurance itself worked out well. I had three months due to my pregnancy that I could not work. I ended up getting far more than I had paid into the policy. Therefore I believe that disability insurance is a FABULOUS thing.I’m not so convinced about the return of premium; I read the first part of your post and got very excited. Maybe I would switch! Then I found out the increased cost of this. No way, at least not for me. I would much rather have a lower monthly payment. That way I have the money “freed up” so that I can save it where I want it, apply it to debt (which I still have), or have it for emergencies. What if you change your mind? Most companies make you reapply for coverage if you change your tier or plan. Then the clock starts ticking again. (For exclusions such as pregnancy claims within ten months and so forth.) Plus what happens if you’ve gone 4 years and 11 months and 14 days and end up dislocating your shoulder? (My policy pays for dislocations and all kinds of stuff in addition to income replacement.) Are you going to skip that claim just so you can get your money back? If you might not use the insurance just so you can get your return, you might as well not have it in the first place.I agree with what Stacey said: insurance is insurance…
July 17th, 2008 at 10:26 am
These Refund of Premium riders are getting more and more popular. You have to keep in mind that insurance companies are excellent at making money, and they know that when they invest your additional premium they’re going to profit on it.
What if you took that $500 a year it would cost you and invested in a solid mutual fund for 5 years? At 8% interest—which is less than the stock market’s 70 year average of 12%—you’d have over $3,000, which looks a lot like what your refund would be anyway. But this is better because you KNOW you’ll get your money back, you’re not risking it by hoping and praying you don’t need to make a claim against your LTC.
Stacey mentioned that insurance is insurance, and not an investment. That’s sound advice. Use it for its intended purpose; don’t try to make bets on whether you’ll need to make a claim. God forbid you do, but if you do need to make a claim, you don’t want to feel guilty for doing it!
Invest the difference, or if you have debt, use the difference to pay off debt. Make your insurance work for you and don’t make bets on whether you’ll need it or not. It’s purpose is to protect your family should something disastrous happen.
July 17th, 2008 at 11:50 am
This is an example of a logical fallacy, though I forget the precise name at the moment. Let me abstract this a bit.
You want insurance in case of X and pay Y. You don’t want X to happen, but if it does you’ll be ok. For an additional cost Z, you can be paid if X doesn’t happen. Now the total cost for just the insurance is Y. The cost for everything is Y + Z and Y > Z.
So if X happens, you get all your money back but the insurance company keeps Y + Z.
If X doesn’t happen, the insurance company keeps (Y + Z)/2.
Without the rider, if X happens, you get all your money back less Y. If X doesn’t happen you lose Y.
Opportunity Cost of Rider:
X Happens: [ Y+Z ] - [ Y ]. = Z
X doesn’t Happen: [ (Y+Z)/2 ] - [ Y ] = (Z - Y) /2
You’ve now basically increased your risk. Should X happen you’ll pay more, and if it doesn’t happen you’ll make more. Did you catch it? You’re making a bet both ways in the hopes that you’ll never use your insurance (to get paid) whereas the whole point of insurance is to protect yourself from unlikely events.
July 17th, 2008 at 12:10 pm
Interesting issue to tackle. Being in debt up to my ears, I would be inclined to pay the smaller amount, and roll the balance difference towards my debt payments, but I’m not sure what I would do if my scenario changed. My gut tells me that more traditional investments would be the way to go tho’.
July 17th, 2008 at 4:39 pm
The math says No.
Take the $502.73 and put it in an account. Add to it every year that exact amount. At just 6% interest, you would be at $3000 in the 5 years. (ok, $2997.62 - close enough). You are guaranteed just $250 less than what you would have gotten as a refund…whether you file a claim or not. Why give it to them and take a chance on losing the whole thing?
Or better yet, use it to pay down your debt and make even more by not losing so much on interest. 
Even if you got zero interest on it, you would still be better off as you would have $2513.65 and NO risk of losing it.
The trick is to make SURE you deposit that money every year.
Remember that the insurance company is NOT out to do you any favors. They would not be offering that item if they didn’t think they would be the ones making the money on it. Kinda like insurance on appliances….by the time you pay for it all you could have bought a new appliance.
July 17th, 2008 at 5:16 pm
I’m with the previous posters. These riders are moneymakers for the insurers, nothing more.
Pay down more debt, save or invest that extra money.
July 17th, 2008 at 5:38 pm
Don’t take the rider. The 20% is over 5 years, on your first years rider. So you are getting a 4% return on it with a huge amount of risk. You could put the additional money in a CD and get 4+% with minimal risk. One good rule of thumb is that if an insurance company is selling you a product to make you money, it is usually a bad deal for you.
July 17th, 2008 at 10:54 pm
My gut instinct was to say take the extra money and invest it in a reasonably safe mutual fund. Adam’s reasoning, though, shortens that advice to one word: FLEE!
July 18th, 2008 at 4:19 am
Totally a scam. Well, it’s obviously legal, but a rip~off nonetheless.
It’s so easy to get sucked in with these things, and believe me, I’m not being judgemental.
We’re presently trying to figure out how to get quit of a “holiday plan” that we bought into in a moment of weakness a couple of years ago.
Adam knows what he’s talking about.
Run a mile! Seriously.