Return Of Premium Life Insurance: How To Get Your Premiums Back
One of the main drawbacks of term life insurance is that you don’t get any benefits if you outlive your insurance coverage period. Considering that the average cost of this type of insurance is $312 per year, it can feel wasteful to see all that money gone and with nothing to show for it.
However, there is a way to recoup what you paid in premiums – return of premium life insurance. In this guide, we’ll discuss how you can benefit from a return of premium policy.
What Is Return Of Premium Life Insurance?
Life insurance products are designed to pay out a lump sum, called a death benefit, upon the policy owner’s death. To be eligible for the death benefit, you have to make regular premium payments to the life insurance company. Life insurance rates are calculated based on your risk profile, which considers your age, medical history, and other factors.
Return of premium (ROP) life insurance is a type of term life insurance that gives the policy owner a limited coverage period. Generally, these types of insurance cover you for 10, 20, or 30 years. Once this period passes, your protection ends. If you still need insurance protection, you’ll have to re-qualify for another policy.
The major difference between premium term life insurance policy and other term policies is that, with the former, the insurance provider will return your payments if you outlive the term of the policy. This refund is guaranteed by the insurance provider, as long as you stay current on your payments.
Both policy owners and beneficiaries are guaranteed to benefit from this type of policy. If you die before the insurance protection ends, your beneficiaries will receive the death benefit. If you survive until the end of the policy, you’ll get all of the money you’ve paid for your insurance, tax-free.
How Does Return Of Premium Insurance Work?
In this section, we’ll go over how return of premium life insurance works and how you can be refunded at the end of your term.
Return Of Premium Rider
An insurance rider is an optional benefit that you can add to your policy. Many insurance providers offer return of premium clauses as a rider on top of your term policy. Life insurance companies charge higher rates in exchange for this guarantee.
However, not all life insurance companies offer an ROP rider. There may also be a difference in features between ROP riders from different insurers. For example, an ROP rider offered by State Farm also features a cash value component that you can borrow against, much like in a whole life policy.
Refunding Your Premiums
Return of premium term life insurance refunds all of your premium costs when your policy term ends. For example, if you paid a total of $20,000 in premiums during your 30-year term coverage period, you’ll be paid back the same amount once the 30-year period has elapsed. This payment is tax-free, meaning that you receive all of the money you paid during the insurance’s life.
To qualify for a premium refund, you need to be alive at the end of the term. Your policy must have also been kept active through timely premium payments.
Benefits Of Return Of Premium Life Insurance
Because it returns all of your insurance payments at the end of its term, a return of premium term life policy can be an appealing option for insurance buyers. In this section, we’ll go over the additional benefits of return of premium life insurance.
Builds Up Your Savings
You can view return of premium life insurance as a savings vehicle with free insurance. If you outlive your insurance, you’ll get your money back. If you die during your term, your family will receive your death benefit. No matter what happens, as long as you pay your policy premiums and keep it active, you won’t lose the money you paid into this policy.
While this savings component doesn’t accrue any interest, this can be useful if you’re not great at money management. By putting away money now, you’ll have an extra pool of cash to draw from later when the insurance term ends.
Tax-Free Premium Refund
All of the money you receive at the end of the term is not subject to income taxes. This means that everything you paid into this policy will be paid back in full if you outlive the insurance term.
Cheaper Than Whole Life Insurance
Whole life insurance is much more expensive compared to return of premium term life insurance rates. For example, a 30-year old man may be charged $91 a month for a $500,000 ROP policy. For the same coverage with permanent insurance, he would have to pay $459 monthly. With its lower rates, ROP life insurance can be a great option if you’re shopping for insurance on a budget.
Drawbacks Of Return Of Premium Life Insurance
Despite its many benefits, ROPs still have some drawbacks you need to pay attention to. In this section, we’ll discuss some of the reasons that this may not be the right policy for you.
Higher Rate Than A Traditional Term Life Policy
While ROP is cheaper than whole life insurance, they still charge higher rates than most term life insurance. You can expect to pay around 30% more compared to a standard term life insurance policy. The life insurance company may also have a minimum life insurance coverage amount for ROPs, which might drive your rates even higher.
You Need To Keep The Policy Active
The key condition for premium return is that the policy needs to be active at the end of your term. If you decide to cancel your protection midway through the policy’s life, you’ll lose your eligibility. In addition, you’ll also be ineligible for payout if you let your policy lapse by not making payments.
Premium Earns No Interest
Your ROP refund is valued at the exact amount of money you paid into your policy. While this means your money doesn’t decrease in amount, you also don’t gain any interest. With inflation, your money will likely be worth less.
Considerations & Caveats
How would you know if return of premium life insurance is right for you? Let’s discuss two key considerations you should think about before applying for return of premium insurance.
Insurance Protection Needs
Before applying for insurance, you should know why you’re getting a policy in the first place. Like term life insurance, an ROP is best used if you’re planning to be insured for a certain period.
ROP insurance is also the safer option if you think you might need whole life insurance but can’t afford it at the moment. Most term life insurance products are convertible to whole life insurance.
Another key consideration is whether or not you want to invest. ROP life insurance policies can act as a savings vehicle with very low risk, but there’s also zero return. Accounting for inflation, your savings’ value might actually decrease by the time you receive the premium payments at the end of your insurance life.
If you’re looking to increase the value of your money over the life of your policy, it might be a better idea to opt for traditional term insurance and invest the rest of your insurance budget. Alternatively, you could opt for whole life insurance with a cash value component. While the risk may be slightly higher, you’ll enjoy a greater rate of return.
Alternatives To Return Of Premium Life Insurance
If you feel that ROP life insurance might not be right for your situation, here are other types of life insurance that you can consider.
Traditional Term Life Insurance
In traditional term life insurance policies, your insurance coverage lasts for a certain period, usually ranging from 10 to 30 years. However, unlike return of premium insurance, this type of insurance doesn’t pay out anything if you outlive the term. You’ll generally have the option to either apply for another term, convert it to whole life insurance, or just allow it to expire.
Similar to return of premium insurance, a traditional term policy is best if you know how long you need to be protected with insurance. The cheaper rates offered by term insurance also make it a great low-cost option for insurance protection.
Whole Life Insurance
Sometimes called permanent life insurance, this insurance product provides long-term coverage. This type of policy will pay out a death benefit regardless of when you die, as long as you keep paying the insurance cost. Permanent life policies also have an investment component that accrues interest during the policy’s life.
Permanent life insurance is best used if you have long-term dependents or would like to leave an inheritance for your family. This type of insurance is also recommended if you’re worried about re-qualifying for insurance due to age or health issues.
Variable Life Insurance
Another type of permanent life insurance, variable life insurance allows you to make investments using its cash value. With variable life insurance, you can invest in different sub-accounts provided by the insurance company, and your gains may vary.
If you don’t mind taking some risks and bearing the extra cost of account management, variable life insurance can yield larger returns than other insurance products.
Return of premium life insurance can be a viable way to provide your family with a cash cushion – whether you outlive your policy or not. If you’re looking for the best return of premium life insurance policy for your situation, Wesley LLC is here to help. Our professional team will be happy to advise you on which return of premium insurance policy is best for you. Contact us today for more information!