What are the actual benefits of the life insurance buy-back option?
A buy-back allows you to restore the value of your life insurance policy after a trauma or TDP insurance claim. If a trauma claim is deducted from your life insurance, after 12 months the buy-back option will add the trauma insurance money back to the term insurance plan.
When is 'buy-back' available?
A life insurance buy-back option is usually available to policies that are bundled with either TPD or Trauma insurance. This option generally adds an additional cost to your plan.
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A buy-back option is added onto your life insurance policy as either a TPD or trauma policy.
If you have a bundled insurance policy with life insurance valued at $500,000 and trauma insurance valued at $100,000 and suffer a health problem that costs the amount of the trauma insurance, the remaining life insurance would total $400,000. If there was to be a claim for life insurance, the amount paid out at this point would be $400,000. However, if you have a buy-back option and 12 months pass, the life insurance would return to $500,000.
There are three types of buy-back options available.
- TPD Buy-Back. A TPD buy-back is a standard buy-back option that allows you to reinstate the full amount of your insurance policy 12 months after a TPD claim. A TPD is total and permanent disablement.
- Trauma Buy-Back. A trauma buy-back works in the same way as a TPD buy-back but is for a trauma such as heart attack or illness.
- Trauma Reinstatement. Trauma reinstatement is an additional option that allows multiple claims to be made against a single trauma policy.
A buy-back option allows for a safety net for your family in case of illness and death.
If we go back to our earlier example, a claim of $100,000 will reduce the total insurance amount from $500,000 to $400,000. If you do not have a buy-back option, the coverage will stay at $400,000 and may not be suitable to cover your family’s needs in the event of death.
However, it is important to consider the design of a buy-back option and what it will cover. TDP will cover disablement and inability to work long-term, whereas trauma will cover illness and short-term health setbacks.
Consider a scenario where a person suffers a heart attack and is unable to work. The trauma insurance will cover the costs associated with the heart attack but will be deducted from the term life insurance amount. A buy-back option is important because after 12 months the life insurance will be reinstated to the full amount, so if a life insurance claim is made the full amount will be paid. This is usually done without the need for underwriting or increases in premium.
Some insurers will include a buy-back option in their policy. Other insurers use a buy-back as an option to be bundled and in this case it will usually cost an additional amount. The amount varies and will require comparison between insurance companies.
As a stand-alone option not bundled with insurance, the buy-back option will generally cost more, however it offers flexibility when changing plans. As a bundled option, the buy-back policy will be included in the insurance premium.
- Some insurers will require underwriting and new premiums.
- A buy-back policy will have an expiration date based off of age.
- A buy-back may be partial or full depending on the terms.
- A repurchased term insurance may not be eligible for indexation increases.
- A buy-back may be dependent on health habits.
- A buy-back may be based off “12 months” or “1 year” which can affect the repayment date.