Why Return of Premium Life Insurance May be The Best Option
When it comes to life insurance, a large number of Americans prefer term instead of whole life because you can typically get a lot more coverage for a lot less premium. Term insurance is significantly more affordable, but there is one major drawback.
If you outlive the length/term of the policy, you lose everything you have put into it. Whole life insurance, on the other hand, accumulates cash value and becomes an asset that could be cashed out someday or even borrowed against.
Within the term life insurance family is a product that addresses the one major concern people have, which is losing all of the money that they pay in premiums. It is called Return of Premium life insurance.
Many experts believe that Return of Premium offers the best of both worlds. While the policy is in force, the policyholder is able to provide financial protection for loved ones in the event of a worst-case scenario. But if they outlive the policy, 100% of the premiums are returned back to them (minus an annual service fee).
How does Return of Premium Life Insurance Work?
Let’s say you purchase a term life insurance policy that provides coverage for 20 or 30 years. return of premium is essentially a “rider” (or add-on) to a standard term policy that allows you to get back all of the money you paid in premiums tax free at the end of the term if the policyholder survives. Sounds good so far, right? But as with everything in life, there are always trade-offs.
The upside to return of premium is of course the ability to get back all of your premium money if you survive the term. Here are a few of the downsides:
- More Expensive: Return of premium life insurance is typically about 30% higher than standard term insurance.
- No Interest Earned on Premiums: Over a 20 or 30-year period, annual inflation will slowly eat away at the value of your money. Unlike whole life insurance, return of premium provides no opportunity to help offset inflation by earning interest on your premiums.
- Early Cancellation is Costly: If you have to cancel the policy for any reason before the term is completed, none of the premiums will be returned to you and you will lose all the money that you put into it.
Is Return of Premium Worth It?
The answer to this question always depends on each individual circumstance, what your financial situation is, and what your goals are. But for a lot of people, return of premium provides the best in protection and financial preservation. While it is true that you will pay significantly higher premiums for the Return of Premium add-on, you are essentially protected either way; if you do not outlive the policy, your loved ones receive a death benefit. If you do outlive the policy, you get back all of your premiums.
Consider, for example, a $1 million 20-year term life insurance policy that costs $70 per month without return of premium and $100 per month with return of premium. If you opt for the cheaper policy without the rider, you will pay $16,800 over the 20-year term, and you will get none of it back if you survive the term.
If, on the other hand, you opt for the return of premium add-on, you will pay $24,000 in premiums over the life of the policy, and either you will die during the 20 year term and your family will get a death benefit, or you will get the entire $24,000 (minus annual service fees) back at the end of the term. This means you will have a large tax-free sum of money to look forward to if you outlive the policy and do not cancel early.
Return of premium life insurance is ideal for individuals who have a low risk tolerance, want to “hedge their bets” as much as possible, and can comfortably afford the higher premium. And since people are statistically more likely to outlive a term life policy, return of premium is a pretty solid bet. However, this add-on may not be ideal for someone on a more limited budget who needs a term policy but is not sure if they might not be able to make the payments at some time in the future.
More sophisticated investors would also want to analyze the difference in returns that they would realize by investing the 30% in additional premiums over the term of the policy versus getting 100% of the premiums back at the end of the policy with a return of premium rider. This is a more detailed analysis that would need to take into account factors such as likely annual returns if you invested the money conservatively (such as CDs) versus investing in riskier and potentially higher reward places like the stock market.
Speak with an Experienced Life Insurance Specialist
Is return of premium life insurance right for you? That is ultimately up to you to decide. If you need help analyzing the various factors, the best place to find this help is by speaking with an experienced independent agent. Independent insurance agents work with a number of the top carriers in your area, and because they are not captive to any one insurer or insurance product, they can review your individual situation and help you find the coverage that best suits your needs and budget.