When you pay your insurance premium, you usually think of that payment as money you won’t ever see again. In fact, if those premiums are for life insurance, there’s a good chance you don’t want them back! However, there are instances where we find ourselves unprepared for the surprises life throws at us, and we need money. Luckily there is a special type of life insurance called return of premium life insurance that can help in some circumstances. As you may be able to guess, this type of life insurance allows you to collect the premiums you’ve paid if you’ve outlived the policy’s term. But do you have to live forever to get it?
What is return of premium life insurance?
Long story short: No, you do not have to live forever to get your premiums back. You see, return of premium life coverage usually comes with a preset length of time, such as 20 or 30 years. If you die during the coverage period, then a death benefit will be paid to your beneficiaries, just like any other form of life insurance. If you outlive the policy, the total of all the premiums you paid is returned to you. Note, however, that these premiums will not accrue interest and some fees may be deducted from the lump sum (this could vary from insurer to insurer).
In many cases, return of premium coverage is not its own standalone policy, but rather a life insurance rider that is attached to the contract of a standard term policy. Term life insurance lasts for a preset term of (typically) 10, 15, 20, or 30 years, and premium payments go entirely toward coverage and will not be returned. Unless, of course, you have a return of premium rider (ROP).
Is return of premium life insurance the same as permanent life insurance?
While there are some similarities, a return of premium is not the same thing as a permanent life insurance policy. A return of premium policy is more closely associated with term life policies, as a return of premium focuses on life insurance coverage for a specific amount of time. When that term expires, the return of premium policyholder gets a lump sum of cash that they have been paying for a set amount of time. However, the cash does not accrue interest, and policyholders are subjected to fees that decrease the amount of money you actually get to take home.
On the other hand, premiums for permanent life insurance go into two different buckets: one is for coverage and the second is for investing. That investment portion is one that a policyholder can eventually get back if they surrender the policy, outlive its maturation, or take out a loan against the policy’s cash value. In some cases, the investment portion may accrue interest. So, even though most of the funds go toward the insurance coverage, the invested portion grows and increases the cash value of the policy, and can be reclaimed as a lump sum when the policy is surrendered or borrowed against.
Is return of premium life insurance worth it?
Return of premium term life insurance has its pros and cons, as does any other life insurance policy. When deciding whether it is a good investment for you, it is important to decide your priorities and what you would be willing to sacrifice, if it came down to it.
Return of Premium Rider Pros
The most obvious benefit of this type of coverage is that you won’t find another type of life insurance that returns your premiums. Even permanent life insurance does not return the coverage portion of your premium payments (just the investment portion). Another pro is that if you do outlive your policy, then that money is not taxed because it is not technically income… It’s like a refund.
Lastly, you can convert your ROP to permanent life insurance even without a medical exam. So, if in the future, your income increases, then you can acquire permanent life out of your already existing ROP.
Return of Premium Rider Cons
The biggest con of a return of life premium, especially when put up against permanent life insurance, is that your premiums are not invested. Instead, someone contemplating an ROP might think of it as a long-term piggy bank.
While a no-interest savings account seems like it is not really a huge con, you have to think of its implications. For one, inflation is real, and it isn’t going away. The economy fluctuates, but one thing for certain is that by the time you can collect your premiums (after a decade or two), that money will likely lose some of its purchasing power. The other thing to think about is the fact that until your term is reached – or until you go to the great beyond – that money is inaccessible. Not even canceling the policy will get the money back to you before the term ends.
Yes, money accessibility and inflation can overshadow a return of premium’s benefits. However, if you’re not going to invest this money anyway, instead spending it on discretionary purchases like annual vacations and a daily latte (or two), then maybe it’s not a bad idea to have someone else hide this money for you… and get life insurance as a side benefit.
Why would I choose return of premium coverage?
You might be wondering….
If someone wants to prevent themselves from spending this money, why not just get a permanent life insurance policy like whole life or universal life, where the cash will be invested?
Sometimes a universal policy may be beyond a policyholder’s monthly budget. With an ROP rider, you will have monthly premiums that cost less than they would if you were investing in a permanent life insurance policy.
On the other hand, the cons of an ROP rider do make it more expensive than your typical term life insurance policy. The key question to ask yourself is how much insurance you need. For example, if you are someone in less-than-excellent health (especially if you are 40 or over), then an ROP policy will likely not align with your financial goals. Not only does the cost double, but if you pass away during your policy, then your family will ONLY receive the value of the policy, but not any of the return of premium. In that case, a traditional term life policy would be best.
Life Insurance that Returns Premiums
For many policyholders, a return of premium is a happy medium between paying premiums they’ll never get back for regular term life insurance and the too-expensive premiums of permanent life insurance. If you are trying to decide whether a return of premium policy is a fit for your life, it’s time to look at your current financial situation and your future financial goals with a life insurance broker at Principled Life. Call us today!
