Is Return of Premium Life Insurance a Gimmick?

Chances are, you have probably never heard of the return of premium life insurance and for a good reason. Only a small fraction, around 2% to 3%, of life insurance policies is the return of premiums that are sold annually. However, some people can provide a welcome benefit depending on the circumstances, while for many others, it may be detrimental financially.

How It Works

This term life insurance may range from 1 year to 30 years, depending on the structure of the policy. The beneficiary will receive the stated benefits if you pass away during that term. The return of premium part means that you should outlive the term of the policy; you get the premiums you paid.

Standard term life insurance means you do not get the premiums back once the term has been completed. This rider means that you can get the premiums back after it is completed.

So, why is this policy so rarely purchased if you can get back the premiums?

Because you must pay considerably extra to get your premiums returned. In fact, the rates are so high that, for many, it does not make the best investment. You are better off taking the difference in savings and investing that in other sources.

Pros and Cons

On the positive side, the policy pays out the same benefits as standard term life insurance and works in every way like regular policies.

• Premiums are returned
• The returned money is tax-free
• It acts like a savings plan
• Built-in cash value where liens can be used

However, despite these advantages, the downsides outweigh the benefits for most people, which is why the policy is rarely used.

• Significantly higher premiums
• Policy cancellation before the term ends significantly reduces, if not eliminates, the refund
• Savings garners little to no interest
• Details of policy may vary widely depending on the insurance company that is used

Basically, you are better off with other insurance policies or investing some of your money into savings accounts, stocks, or other means to earn a higher interest.

For example, if you were to save $10,000 at 3% interest which is considered low, you would still earn roughly $300 extra a year. That is considerably more money that return life insurance policies which offer far less interest if any at all.

When Return of Premium Works for You

This type of insurance is not designed for most people. The exceptions would be those who are young, have considerable income-earning potential, and have a medical or lifestyle concern that may cause premature death. In such cases, outliving the policy and getting the money back means it can be reinvested in other areas to earn greater interest.

Otherwise, you are much better off seeking out standard term life insurance policies that cost considerably less over time. The return of premium term life insurance should only be for rare cases in which your insurance company deems it the best solution for your needs.