Considering Return of Premium Life Insurance? Here’s What You Should Know
Term life insurance has always been a bit of a gamble. After all, you pay into a policy for years without knowing if your loved ones will benefit from it. But what if you could take away the risk?
Return of premium life insurance is designed to do exactly that, but it’s not without drawbacks. Keep reading to find out everything you need to know about the return of premium rider and if it’s right for you and your family.
What Is Return of Premium Life Insurance?
Return of premium life insurance is a type of term life insurance where, if you’re alive at the end of the term, you’ll get all the premiums you’ve paid returned to you. It can be a standalone policy or added to your standard term life insurance as a return of premium rider.
This can sound incredibly appealing, but there are a few things you’ll want to know before choosing this type of insurance.
How Does Return of Premium Life Insurance Work
With standard term life insurance, you purchase life insurance for a set period of time (usually 10-30 years). If you pass away during that term, your beneficiaries would receive your death payout. If you survive the term, your life insurance expires.
With the return of premium rider, if you survive the term of the insurance, then you get back all of the premiums you’ve paid during the term of your life insurance. Your insurance provider may subtract some one-time fees, but the amount returned to you is not taxable since it’s just a refund of payments you made.
If you do pass away during the term, your beneficiaries receive your death benefit like usual.
The Pros and Cons of Return of Premium Life Insurance
The main benefit of the return of premium rider is clear: getting refunded everything you’ve paid if you don’t end up using the life insurance is tempting. For many, it can act as a forced savings vehicle to net them a tidy sum at the end of the term.
Plus, since your beneficiaries still received your death benefit if you do pass away, it can seem like a win-win situation.
However, there are a few drawbacks you’ll want to be aware of:
- The premiums are much higher than standard term life insurance, as much as 2-3 times higher
- You need to hold the policy for the entire term and can’t miss any payments
- The money you receive back is depreciated after 10-30 years, due to inflation
Because of these drawbacks, it often makes more sense to purchase a standard term life insurance and invest the difference. Years of compound interest will likely net you more, especially since your premiums depreciate over the years.
Is Return of Premium Term Life Insurance Worth It?
Whether or not the return of premium rider is worth it for you depends on a few factors. If you know you’re not great at saving or you don’t want to take risks in the stock market, return of premium insurance might make more sense for you financially with the forced savings vehicle that pays out right around retirement age.
Otherwise, your money will likely go farther by being invested, so a standard life insurance policy might suffice.
You’ll also want to decide if the higher premiums make sense for you, especially since if you default on your payments, your policy (and refund) could be voided.
Your Takeaways
For many, paying into a life insurance policy for years and potentially seeing no return is enough of a reason to choose return of premium life insurance, and there’s nothing wrong with that. If the premiums make financial sense for you and you’re confident you can keep up with the payments over the years, then opting for a return of premium rider is a valid option and will net you peace of mind over the years.
Otherwise, standard term life insurance is a cost-effective option that’s enough for most families.