Term life insurance is by far the cheapest type of life insurance coverage that you can buy. But it only lasts for a specific period of time. Those who outlive the term of their coverage have essentially received nothing in return for all of the premiums that they paid. Return of premium life insurance was therefore invented in order to provide buyers of term life insurance a way to get at least some of their money back at the end of the term.
Return of premium life insurance can be a useful addition to a standard term policy, but there are a few things you need to know about this type of policy (or rider) before you add it to your coverage. Here is a closer look at how this type of guarantee is structured.
Return of Premium Life Insurance Explained
In a nutshell, return of premium life insurance functions exactly like its name. When you reach the end of the term for your term policy, then a return of premium policy will refund you some or all of the premiums that you have paid since the beginning of the term.
Return of premium life insurance is only available with term insurance policies. Some policies have this feature directly built into the policy while other carriers offer this feature as an additional rider that can be purchased for an additional cost, as shown in the example above. Some policies and riders also allow the insured to choose the amount of premium that they want refunded; for example, a rider that will repay the insured 60 or 80 percent of the monthly premium may be offered at a lower cost.
Who Needs Return of Premium Life Insurance?
Determining the value of a return of premium life insurance policy is largely based on your individual financial situation and goals. While no one needs a return of premium life insurance policy, it definitely has its benefits. A return of premium life insurance policy is a great option for someone who can afford to pay a little extra each month to guarantee that they’ll have some savings.
For example, receiving a large sum of money back at the end of your life insurance policy’s term can be a great way to head into retirement – especially since the sum will be tax free. But it’s important to understand that you’re not gaining additional or new money. Instead, you’re getting back money that was yours to begin with. So while return of premium life insurance can be a nice saving option if you’re looking to set aside some money for retirement or have a guarantee of getting money back, it’s also worth noting that there are other savings options that could give you a greater return. In short, since you’re not getting interest on the money you pay into your life insurance premiums then you’re missing out on money you could have gained if you’d invested your cash instead.
The Average Cost of Return of Premium Life Insurance
The return of premium feature that either comes with a term policy or is added on as a rider is not cheap. Most return of premium policies or riders will add at least an extra 30% to the cost of the premiums paid, and some cost much more.
Let’s look at an example of the difference in price with a $250,000 30-year term life policy issued by State Farm. A 25 year-old woman in excellent health would pay $19.90 per month for this policy without the return of premium feature. If a return of premium rider is added to her policy, then her monthly premium would climb to $51.77 per month. Over the life of the policy, she would pay out an additional $11,473.20. But if she outlives the term, then she’ll receive the entire $18,637.20 back that she paid over the past 30 years.
Pros and Cons of Return of Premium Life Insurance
As with any insurance options, there are pros and cons to a return of premium life insurance policy:
|Most or all of your premiums are refunded if you keep the policy in force until the end of the term||Premiums are more expensive than a term policy without the return of premium rider|
|The total amount of premiums that are returned is tax-free||You don’t earn any interest on your investment|
|You will know exactly how much you will receive at the end of the term||No premiums are returned if the policy should lapse for any reason|
Premiums Are Refunded
The most obvious pro of this type of rider is that your premiums will be refunded (either in part or in whole) at the end of your policy’s term. This means that, so long as your policy does not lapse, you will be receiving a guaranteed amount of money once your policy expires. This allows you to more easily plan for things like retirement or paying off debts.
The lump sum that you receive when your premiums are returned to you is tax free – meaning that you will be getting back exactly what you paid in. Again, having a sum of money that you know you will be receiving – without having to worry about losing some of it to taxes – makes planning for your financial future much easier.
You know exactly how much money you will be getting back. There will be no surprises.
More Expensive Premiums
As with any insurance policy, adding a rider or additional benefit comes with an additional cost. A return of premium rider will increase the costs of your premiums meaning that you’ll be spending more money upfront. But this will, in turn, give you back more money when your premiums are returned to you.
No Earned Interest
Unlike other savings or investment options, a return of premium policy doesn’t offer you any interest on your money. So it’s possible that you’ll be getting back less money than you could earn with another type of investment opportunity.
You Could Lose Your Premiums
If your policy lapses for any reason your premiums will be lost and you won’t get them back. So if you’re at all worried about being able to pay your premiums then you might do well to go with a regular term policy.
Frequently Asked Questions
What is the best life insurance company?
There is no one “best” life insurance company for everyone. The best life insurance company for you is the one that can give you the most coverage and additional features for your money. But what’s best for you is often not the best for someone else. This is because many life carriers cater to a specific segment of consumers, such as those with specific health problems.
How much life insurance do I need?
The answer to this question depends upon your specific needs and financial situation. If you are the primary breadwinner for a family that is entirely dependent upon you, then you will need more coverage than a single person in most cases. Most financial planners will tell you that you should have at least enough life insurance to pay off your debts and provide for your dependents for at least a certain period of time (such as when they graduate from school).
What if I can’t medically qualify for traditional life insurance?
If your health is poor enough to prevent most insurance companies from covering you, you’ll need to look at guaranteed-issue life insurance that doesn’t require a medical examination. These policies are more expensive than traditional policies, but they may be your only option.
What are accelerated benefit riders?
These riders can allow you to access the death benefit from your life insurance policy while you are still living. In most cases, these riders are triggered by your inability to care for yourself on a daily basis. For example, if you become disabled or unable to perform at least two out of the six activities of daily living (ADLs), then you can use some or all of your death benefit to pay for home health care or nursing home expenses.