Term life insurance is an insurance product with an easy-to-understand process and value proposition.
With term coverage, you pay an ongoing insurance premium for the full term of your policy — usually between ten and thirty years.
If you pass away during the term, the life insurance company loses their bet, so to speak, and your beneficiaries are paid out in the amount of term coverage you purchased.
If you outlive the term of your policy, on the other hand, you don’t get anything in return other than the peace of mind you had while your policy was in force.
That peace of mind is why most people buy life insurance anyway.
With a term life insurance policy in place, you can rest assured your income will be replaced if you should pass away before your time.
You can buy enough life insurance to make sure your children’s college education is covered, or that the home you live in is paid off in full.
The goal of a term life insurance policy is making sure your family is taken care of in your absence — and even after you’re long gone.
You may think you’ll live forever, but nobody knows if they will be involved in a sudden car accident or fall victim to a serious and incurable illness.
With all those variables in mind, life insurance protects against all of life’s “what ifs.”
What is a Return of Premium Life Insurance Policy?
If you’re considering a term life insurance policy for all the reasons we’ve outlined above, you might be surprised to hear that a certain type of policy — return of premium life insurance — will return all your monthly premiums once your policy’s term is over.
With these policies, you typically receive every penny you paid in, including premiums for riders you may have purchased.
If you purchased a thirty-year term policy for $250,000 and it cost you $50 per month over the course of that time (360 months), you would receive a check for $18,000 once your policy ended.
You may be wondering why an insurance company would agree to these terms, and the answer is rather simple.
Return of premium insurance policies charge higher premiums to consumers to make up for the benefit — usually 30% more than you’d pay with a regular term life insurance policy.
Once you start paying in, the life insurance companies utilize your excessive premiums to earn a return they can use to reimburse you once your policy ends.
In a lot of ways, return of premium life insurance is a type of forced savings account.
You pay a little more for life insurance than you normally would, but you receive a lump sum of cash when your policy ends.
The best part is, you still get the protection life insurance offers the entire time your policy is in force.
The Advantages of Return of Premium Life Insurance
Most people who buy life insurance try to pay as little as possible each month, so why would anyone want to pay more than required to buy a basic term policy?
That’s the main question anyone considering return of premium coverage should ask.
What is the point of paying 30% more for coverage when you could just save those funds and invest them instead?
Still, there are advantages to return of premium coverage which make these policies a good deal for many consumers.
Here are a few of the main benefits:
- You are forced to save for your future. You could buy a basic term policy for less and save or invest the rest, but would you? A return of premium policy forces you to pay in each month, resulting in a sum of cash you’ll receive when your policy ends.
- You get “free” life insurance if you outlive your policy’s term. Provided you outlive your policy’s term, you’ll most likely receive every penny you paid in premiums back. This means that over the course of your policy, you received life insurance coverage for no out-of-pocket cost.
- Term life insurance is an affordable product already, so paying 30% more for return of premium coverage may not be a big deal. If you’re young and healthy, term life insurance can be downright cheap. You may not mind paying an extra 30% if your policy only costs the price of a dinner out anyway.
At the end of the day, return of premium life insurance provides the best of both worlds. You benefit from forced savings while also protecting your family against financial consequences resulting from your death.
And since term life insurance can be extremely affordable, these policies can fit into nearly any family budget.
The Disadvantages of Return of Premium Life Insurance
While return of premium life insurance provides consumers with yet another way to protect their family plus the promise of a cash bonus at the end of their policy, it’s far from perfect. Here are some of the reasons you may want to skip return of premium life insurance in favor of a traditional term policy.
- You could earn a greater rate of return investing your excess premiums on your own. The common wisdom surrounding these policies is that you’re better off to buy traditional term coverage and invest the difference. Even if you’re only paying an extra $10 per month for your policy, those extra dollars could add up quickly. If you saved $10 per month for 30 years and earned an 8% return, you would have $13,593.99. With a return of premium policy, you would only get exactly what you paid in over that time — only $3,600 for the $10 per month in excess payments for 360 months.
- It’s possible you’ll find limited options among return of premium life insurance policies. Some insurance companies limit the type of policies they offer with return of premium coverage. You may be limited to term policies in certain amounts or for certain lengths of time. You’ll have more options to consider if you look for a traditional term policy instead.
- You’re paying more for coverage than required, and you should consider the opportunity cost. While paying 30% more for life insurance may not seem like a big deal, there’s an opportunity cost any time you spend money you don’t have to spend. For example, you could use the excess payments to pay down high-interest debt, save for your children’s college education, or buy even more term life insurance to protect your family.
How to Decide Whether to Buy Return of Premium Coverage
If you’re on the fence about life insurance, that’s probably good news.
You should be thinking through this issue thoroughly since it could be one of the most important decisions you will make in your life.
The good news is, there is only one decision that’s 100% wrong — not buying any life insurance at all.
Whether you opt to purchase a typical term life insurance policy, a return of premium life insurance policy, or even whole life insurance, any of these options will leave your family a lot better off if the worst-case scenario unfolds. Whether you’re in good health and chasing the best rates on the market, or you’re looking for a no exam policy, there is a life insurance plan for you.
To decide whether to buy return of premium coverage, it helps to ask yourself a few simple questions:
- Are you disciplined enough to save the difference if you bought a traditional term policy? If not, you may benefit from the forced savings component of a return of premium policy.
- Are you buying enough life insurance coverage for your family? Ask yourself if you would be better off buying a traditional policy in a higher amount instead of paying more for return of premium life insurance coverage.
- Does paying 30% more for life insurance fit in with your other financial goals? If money is tight, you may be better off spending those excess funds elsewhere or saving them for a rainy day. Research life insurance rates to decide which type of policy matches your goals best.
Is Return of Premium Life Insurance Worth It?
At the end of the day, any life insurance policy is better than not having one at all.
After all, it is your duty to protect your family against the financial implications of your death, and that includes protecting them from the loss of your income and any debts you carry while you’re alive.
Should you be willing to pay more for return of premium life insurance? Only you can decide what you’re willing to pay and how much coverage you need.
However, becoming educated on your options is a great place to start.
As you continue your search for the right life insurance policy for your family, it can help to get quotes from several different companies for the coverage amount you intend to buy.
You may find that return of premium life insurance is more affordable than you realized, but you may also find a traditional term life insurance policy is a better fit for your budget.
The best life insurance companies make it easy to explore policy options and costs online, so don’t delay your search any longer.
You’ll sleep better at night once a life insurance policy is in force.