Return of Premium Life Insurance
Return of premium life insurance is a specific type of term life policy which will refund the money you’ve spent toward monthly premiums should you outlive the policy. These policies typically last 10, 20 or 30 years and tend to be more expensive than traditional term life insurance.
- Return of premium life insurance is a type of term life insurance outlining that if you die within the term — or number of years — specified in the policy, it pays out.
- The chief characteristic of return of premium life insurance is that it gives you the option to receive all the premiums you paid into it if you are still alive at the end of the term.
- Monthly premiums for return of premium life insurance tend to be considerably more expensive than for other types of term life insurance.
What Is Return of Premium Life Insurance?
Return of premium life insurance is a type of term life insurance, meaning the policy provides coverage for a specific period of time. If you die during that time, your beneficiaries will receive money from the insurance company in the form of a death benefit.
With a return of premium policy, any money you paid for the insurance premiums is refunded tax-free at the end of the term.
As an example, let’s look at a hypothetical case in which a 35-year-old man can choose either a traditional term life insurance plan or a return of premium life insurance policy. Both have 30-year terms, but he lives well past the term.
|EVENTS||$500,000 30 YEAR TERM LIFE POLICY||$500,000 30 YEAR RETURN OF PREMIUM POLICY|
|Term (Number of years)||30||30|
|Total premiums paid||$19,080.00||$32,400.00|
|Return of premium||$0.00||$32,400.00|
|Total cost over time||$19,080||$0.00|
As illustrated, he can get his money back instead of paying for something he never used by choosing the return of premium policy.
Return of premium life insurance tends to be more expensive than traditional term life insurance. The feature can sometimes be added as a rider to a term life policy for an extra cost.
How Does Return of Premium Life Insurance Work?
Return of premium life insurance policies are relatively straightforward.
- Return of premium life insurance is sold for a set term — typically 10, 20 or 30 years.
- You make monthly or annual payments, known as premiums, to keep the policy in force.
- If you die while the policy is active, the insurer will pay money to the beneficiaries listed on the policy. Higher coverage amounts equal higher premiums.
- If you outlive the policy, 100% of the premiums you already paid are returned to you at the end of the term.
However, some restrictions may apply to your policy.
- You might not get any money back if you cancel your policy before the end of the term or if you miss premium payments.
- You may be required to purchase a minimum amount of coverage, such as $100,000.
- Several of the nation’s largest life insurance companies don’t sell return of premium life insurance.
Which Companies Offer Return of Premium Life Insurance?
Return of premium life insurance policies or riders are available from a wide range of companies. These may be large, national brands or smaller insurance companies you may have never considered.
It’s best to look at a wide range of insurers — or have an independent agent or broker compare them for you — to narrow down your options.
- AAA Insurance
- AAA offers return of premium life insurance for 15-, 20- and 30-year terms. Coverage amounts range from $100,000 to more than $5 million.
- Assurity Life Insurance
- Assurity has options if you want a return of premium policy with a 20 to 30 year term.
- Cincinnati Life Insurance
- Cincinnati Life Insurance offers return of premium policies with 20-, 25- and 30-year terms. Be aware that they do require a medical exam, and you have to speak with an agent to get a quote.
- Country Financial
- Country Financial return of premium riders are available for 20- and 30-year term life insurance policies.
- Illinois Mutual
- Illinois Mutual offers return of premium policies of 20- and 30-year terms, or until you reach age 65. Coverage ranges from as little as $50,000 up to $500,000.
- Indiana Farm Bureau
- Indiana Farm Bureau life insurance allows you to convert your return of premium policy to a paid-up or partially paid-up permanent life insurance policy. This conversion also allows you to receive a cash payment of part of your premiums.
- The return of premium rider in Nationwide’s No-Lapse-Guarantee universal life insurance policy allows you to surrender your coverage at two specific times. If you do it in year 16 of coverage, you get the lesser of either 50% of the premiums you paid or 40% of the policy’s base specified amount. If you wait until year 21, you get the lesser of 100% of the premiums paid or 40% of the base specified amount. You pay extra for the return of premium rider.
- State Farm
- State Farm allows you to buy term life coverage with a return of premium option. But the policy also allows you to build cash value, and you are allowed to borrow against the policy in certain situations.
How To Choose the Best Return of Premium Life Insurance
When choosing a return of premium life insurance policy, you should first evaluate the company.
Look for customer reviews and financial ratings of the life insurance companies you are considering. Ask about pricing options and compare insurance products from different companies before making a decision.
You want a company that is financially sound as well as reliable and trustworthy. Consider premium prices, product selection and the company’s financial history and stability.
- AM Best
- AM Best bases ratings on a company’s operating performance, risk management and overall fiscal strength.
- The Better Business Bureau
- Typically rating local businesses, the Better Business Bureau bases ratings on customer complaint history and on the insurance company’s ability to resolve those complaints.
- J.D. Power
- J.D. Power is an independent business rating firm that publishes customer satisfaction scores. It rates more than 20 large insurance companies each year.
Is Return of Premium Life Insurance Worth It?
Your personal financial situation, goals and risk tolerance are the factors that determine whether a return of premium policy is right for you.
Before you purchase any type of life insurance, it’s important to understand the pros and cons.
Pros of Return of Premium Life Insurance
Tax-free cash returned to you is arguable the greatest pro of buying return of premium life insurance. But, it’s not the only benefit.
- There’s No ‘Use It or Lose It’ Drawback
- With traditional term life policies, you’ll pay thousands of dollars over the course of 10, 20 or 30 years for something you may never use. Return of premium life insurance, on the other hand, refunds what you put in (as long as you live to the end of the term).
- Premiums Are Returned Tax-Free
- Money you receive from a return of premium life insurance policy is considered a refund, not an income payment. Therefore, it isn’t taxable.
- Extra Money for Retirement
- Many term life insurance policies expire when people approach retirement. Receiving a large sum of money through a return of premium policy can help boost your savings and grow your retirement nest egg when you’re older.
Cons of Return of Premium Life Insurance
While it may sound appealing to get your money back, return of premium policies also have drawbacks. The added cost is one of the biggest downsides.
- According to Forbes, a return of premium life insurance policy or rider costs about 30 percent more than a traditional term life insurance policy. If you’re age 40 and older and in less-than-excellent health, these policies may be double or even triple the cost of a normal term policy.
- You Could Invest the Difference Elsewhere
- Paying more each year for a return of premium policy adds up. You could invest this extra money elsewhere — such as in the stock market — and see a greater return.
- No Interest
- Unlike other savings vehicles, such as 401(k)s or a bank account, the money you receive from a return of premium policy does not earn compounding interest.
- It’s Much More Expensive if You Die
- If you die during the term period, your family will receive the value of the policy — not its value plus a return of premium. In this scenario, having a traditional term life insurance policy is cheaper for you and your beneficiaries.
Return of Premium With Whole and Universal Life Insurance
Whole and universal life insurance are both considered permanent life insurance — that is, they are in effect for as long as you live, so long as you continue paying premiums. So you won’t outlive the policy and shouldn’t need a return of premium in most cases.
Both have maturity dates, a date at which you can receive the entire cash value of your policy.
Typically, whole life policies mature when you turn 100. Universal life can be purchased to mature when you turn 100 or as old as 121.
However, some companies offer a return of premium option on certain guaranteed universal life insurance policies.
These options allow you to surrender your policy at certain points during your coverage, exchanging your coverage for a return of your premiums paid.
A real-life scenario for using this option would be if your spouse — who was your sole beneficiary — dies, and you no longer have a need for the policy.
Alternatives to Return of Premium Life Insurance
Return of premium life insurance, while it offers some advantages in certain situations, is not the best option for everyone.
There are alternatives you should consider that may be a better choice for you.
- Traditional Term Life Insurance
- Also called level term life insurance, this alternative is the most affordable life insurance option for most people. The monthly premiums can be far lower than those of return of premium life insurance. But you won’t get your premiums back at the end of the term.
- Investing Elsewhere
- Return of premium life insurance is comparable to giving the insurance company a zero-interest loan for 30 years. Even though you get your premiums back at the end of the term, you do not earn back the interest on the money you paid into the policy.
Frequently Asked Questions About Return of Premium Life Insurance
6 Cited Research Articles
- Herbert, M. (2020, October 29). Money Matters: Return of premium life insurance policies. Retrieved from https://www.wmur.com/article/money-matters-return-of-premium-life-insurance-policies/34523276
- Schneider, J. and Auten, D. (2018, August 19). How Return Of Premium Term Life Insurance Could Save You Thousands. Retrieved from https://www.forbes.com/sites/debtfreeguys/2018/08/19/how-return-of-premium-term-life-insurance-could-save-you-thousands/?sh=68312c30725a
- Better Business Bureau. (2017, October 27). BBB Tip: Life Insurance. Retrieved from https://www.bbb.org/article/tips/14095-bbb-tip-life-insurance
- Blyskal, J. (2015, April 6). Is Whole Life Insurance Right for You? Retrieved from https://www.consumerreports.org/cro/news/2015/04/is-whole-life-insurance-right-for-you/index.htm
- A.M. Best. (n.d.). Home Page. Retrieved from https://www.ambest.com/home/default.aspx
- Insurance Information Institute. (n.d.). What are the different types of term life insurance policies? Retrieved from https://www.iii.org/article/what-are-different-types-term-life-insurance-policies