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 are the return of premium that are sold annually. However, for some people, they can provide a welcome benefit depending on the circumstances while for many others it may be detrimental financially.
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How It Works
This is term life insurance that may range from 1 year to 30 years depending on the structure of the policy. If you pass away during that term, the beneficiary will receive the stated benefits. The return of premium part means that you should outlive the term of the policy, you get the premiums that you paid. Standard term life insurance means that you do not get the premiums back once the term has completed. This rider means that you can get the premiums back after it is completed.
So, if you can get back the premiums, why is this type of policy so rarely purchased?
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. In fact, 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 amount of benefits as standard term life insurance and works in every way like regular policies.
- Premiums are returned
- The returned money is tax-free
- 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 types of 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 for those who are young, have considerable income-earning potential, and have a medical or lifestyle concern that may cause their premature death. In such cases, outliving the policy and getting the money back means that it can be reinvested in other areas to earn a 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.