A term life insurance policy can be an excellent way to protect your family for a specific time period, such as when your children are young. If you live long enough, you may come to regret all of the premiums you paid that did not result in a payout. One way to avoid this is to include a return of a premium rider in your policy or purchase one that does. This type of endorsement or policy guarantees that when the policy expires, you will be paid by your insurer, which may include some or all of the premiums you paid into it.
An explanation of the refund of life insurance premiums
Return of premium life insurance is exactly what it sounds like: if you keep the policy active and consistently pay your premiums so that it does not lapse, you will receive a payout at the end of the term in the amount of the premiums paid for your base policy, even if you live much longer than the term. Certain fees or premiums paid for other policy endorsements may not be refunded, so check with your individual life insurance provider to see what is excluded.
The functionality of return of premium is only available with term life insurance, which is typically less expensive than the other main type of life insurance, known as permanent life insurance. Term policies, unlike permanent insurance, have a set number of years—often 10, 20, or 30—and no cash value. Term policies only pay out a death benefit if the policyholder dies before the term expires.
If you have a return of premium rider on your policy or if the return of premium functionality is built into the policy, this changes. If this is the case, when the term expires, the insurer will pay you a payment that is not a death benefit but typically includes some or all of the premiums you have paid into the policy. Keep in mind that this type of policy or endorsement will raise your premium because it guarantees that you will receive money back from the insurance company at the end of the term.
Who requires life insurance with a return of premiums?
Your personal financial situation and goals heavily influence the value of a premium life insurance policy. While some people may not require a return of premium life insurance policy, there are some advantages to having one. A return of premium life insurance policy may be a good choice for someone who can afford to pay a little extra each month to ensure they have some savings.
For example, getting a large sum of money back at the end of the term of your life insurance policy could be helpful as you get closer to retirement, especially if the money is tax-free.
However, you must understand that you are not making any new or additional money. Instead, you get the money that was previously yours. While the return of premium life insurance can be a good way to save for retirement or have a guarantee of getting your money back, there may be other savings options that can provide a higher return. In short, you are not earning interest on the money you pay into your life insurance premiums, but you could if you invested it instead in an interest-bearing account. Consult a financial advisor to determine what is best for you.
The typical rate of return on premium life insurance
Because the insurance company will have to pay you back at the end of your term, the “return of premium” feature, which is either included with a term policy or added as a rider, is likely to raise your premium. Because each policy is unique and is based on a number of factors, including your gender, age, and general health, the amount it adds to your policy varies. The younger you are and the better your health, the less you will have to pay for an insurance policy.
Consider the following example, which is based on a $250,000, 30-year term life policy. Assume a 25-year-old woman in good health pays $19.90 per month for this policy if the return of premium feature is not available. If she adds a return of premium rider to her policy, her monthly premium rises to $51.77. If she lives past the term, she may be able to receive the entire $18,637.20 she paid over the previous 30 years.
Is this a worthwhile investment? It depends on the circumstances of the individual. Speaking with a financial advisor about what is best for you can assist you in answering that question.
The benefits and drawbacks of return of premium life insurance
A return of premium life insurance policy has pros and cons, just like any other insurance policy. Only you can determine whether the benefits of this type of policy make it a worthwhile investment for you.
- Most or all of your premiums are refunded if you keep the policy in force until the end of the term.
- The total amount of returned premiums are tax-free.
- At the end of the term, you will know exactly how much money you will receive.
- Premiums are higher than they would be for a term policy without the premium return rider.
- You receive no return on your investment.
- No premiums are returned if the policy lapses for any reason.