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Return of premium life insurance can be a good way to plan for the future. This type of insurance offers the assurance of a payout — unlike other term life insurance policies — with the policyholder receiving back the premiums paid if they outlive the term. While it comes with a higher premium than traditional term life insurance, return of premium policies can be an attractive option for some. Here’s what you need to know to decide if return of premium life insurance is right for you.
Life insurance with a return of premium is just what it sounds like: if you keep the policy active and consistently pay your premiums so that it does not lapse, you will receive a payout in the amount of the premiums paid for your base policy at the end of the term, even if you survive well beyond it. Certain fees or premiums paid for other endorsements on your policy may not be refunded, but you’ll have to check with your individual life insurance provider to see what may be excluded.
Return of premium functionality is only available with term life insurance, which is usually more inexpensive than the other main type of life insurance, called permanent life insurance. Term policies last for a specific number of years — often 10, 20 or 30 — and they do not have a cash value, as permanent insurance does. Term policies feature only a death benefit that pays out if you pass away before the term is over.
That changes if you have a return of premium rider on your policy, or if return of premium functionality is built into the policy. If that is the case, when the term is over, you will receive a payment from the insurer that is not a death benefit, but which typically includes some or all of the premiums you have paid into the policy. Keep in mind that this type of policy or endorsement will increase the amount you pay for your policy since it is guaranteed that you will get money back from the insurance company at the end of the term.
Determining the value of a return of premium life insurance policy is largely based on your individual financial situation and goals. While some might not need a return of premium life insurance policy, it has some benefits. A return of premium life insurance policy could be 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 may be helpful when you are heading toward retirement — especially since the sum is 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, there may be other savings options that could give you a greater return. In short, you’re not earning interest on the money you pay into your life insurance premiums, but you could earn interest on that same money if you invested it in an interest-bearing account instead. Consider speaking with a financial advisor to see what is right for you.
The return of premium feature that either comes with a term policy or is added on as a rider is likely to increase your premium since the insurance company will have to pay you back at the end of your term. The amount it adds to your policy varies because each policy is unique and is based on a number of factors, including your gender, age and general health. The younger you are and the better your health, the less you are likely to have to pay for a policy.
Let’s look at a possible example based on a $250,000, 30-year term life policy. Let’s say a 25-year-old woman in excellent health pays $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 climbs to $51.77 per month. But if she outlives the term, then she could receive the entire $18,637.20 back that she paid over the past 30 years.
Does that mean it’s a good investment? It depends, since everyone’s circumstances are different. Talking with a financial advisor about what’s right for you can help answer that question.
As with many insurance options, there are pros and cons to a return of premium life insurance policy. Only you can determine whether the pros make this type of policy a good investment for you.
| Pros | Cons |
|---|---|
| Most or all of your premiums are refunded if you keep the policy in force until the end of the term. | Term insurance policies with a return of premium 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. |
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. Many life insurance carriers cater to a specific segment of consumers, such as those with specific health problems. It may be beneficial to do some research to narrow down your options and get quotes from a few companies to see which one is right for you.
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 probably need more coverage than a single person. 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 until they graduate from school). One way to estimate the amount of insurance you need is to use a life insurance calculator to get a big-picture view of your financial situation.
If your health is poor enough to prevent most insurance companies from covering you, consider looking at guaranteed-issue life insurance that doesn’t require a medical examination. These policies can be more expensive than traditional policies, but they also offer options to those who are unable to purchase traditional life insurance.
Accelerated benefit riders 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 an 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. Check with your life insurance company to learn more about its specific guidelines for this type of rider.
Most life insurance companies offer traditional term life insurance, but not all offer return of premium life insurance. Speaking with a licensed life insurance agent or another financial professional is the best way to identify which companies offer term life with a built-in return of premium or return of premium as a policy endorsement.
Whether return of premium life insurance is worth it depends on your personal goals and financial situation. Since return of premium life insurance will ensure that you receive a payout when the policy expires, insurance companies typically charge a higher price for these types of life insurance policies or policy riders. Note that, unlike whole life insurance, return of premium life insurance does not build cash value over time, making savings and investments more appealing to some individuals. However, if you can afford to pay a higher life insurance premium for a guaranteed payout, return of premium may be worth looking into.
