Return of Premium Life Insurance

Return of premium life insurance will refund any money you’ve paid as premiums if you outlive the policy. These policies usually last 10, 20 or 30 years and tend to be more expensive than traditional 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 the death benefit.

With a return of premium policy, any money you paid for the insurance is refunded tax-free at the end of the term.

In other words, you get your money back instead of paying for something you never used.

Return of premium life insurance tends to be more expensive than traditional term life insurance. This feature can also be added as a rider to a term life policy for an extra cost.

How Does Return of Premium Life Insurance Work?

The way a return of premium life insurance policy works is straightforward.

How a Return of Premium Life Insurance Policy Works in 4 Steps
  1. Return of premium life insurance is sold for a set term, typically 10, 20 or 30 years.
  2. You make monthly or annual payments, known as premiums, to keep the policy in force.
  3. 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.
  4. If you outlive the policy, 100 percent of the premiums you paid are returned to you at the end of the term.

However, some restrictions may apply to your policy.

Potential Limitations of Return of Premium Life Insurance
  • 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.

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
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.
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.

While it may sound appealing to get your money back, return of premium policies have drawbacks.

Cost is one of the biggest downsides.

Cons of Return of Premium Life Insurance
Cost
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.
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 case, having a traditional term life insurance policy is cheaper for you.

People with high incomes and a low risk tolerance may find these policies more appealing than other consumers.

Last Modified: January 28, 2021

3 Cited Research Articles

  1. 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
  2. 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
  3. 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