Return of Premium Life Insurance

Life insurance is an important product for those who want to protect their loved ones financially in case of their untimely death. However, traditional life insurance policies do not have an investment component to them. That means that if you outlive the term of your policy, you get no benefit. That’s where a return of premium life insurance policy comes in. In this article, we will take a look at what return of premium life insurance is, how it works, and its benefits and drawbacks.

What is Return of Premium Life Insurance?

Return of premium life insurance is a type of life insurance policy that returns the premium payments made by the policyholder if they outlive the term of the policy. The premium payments are returned tax-free to the policyholder, making this type of policy more attractive to those who see life insurance as an added expense and want to recoup the money paid in premiums over the years.

This type of policy is similar to a traditional term life insurance policy, which pays out a death benefit to the beneficiaries named in the policy if the policyholder dies within the stated term of the policy. However, the main difference with return of premium life insurance policy is that if the policyholder outlives the term of the policy, they receive all the premiums paid back to them, making it a risk-free investment.

How Does Return of Premium Life Insurance Work?

A return of premium life insurance policy is a term life insurance policy that has an added rider. The rider guarantees that if the policyholder outlives the term of the policy, they will receive all the premiums paid back to them. The premiums paid in return of premium life insurance policies are usually higher than those for traditional term life insurance policies because of the added rider.

For example, let’s say a policyholder purchases a return of premium life insurance policy with a 20-year term and pays an annual premium of $1000. If the policyholder outlives the 20-year term, they will receive a lump sum payment of $20,000 at the end of the term.

Benefits of Return of Premium Life Insurance

Tax-Free Lump Sum Payment

One of the main benefits of return of premium life insurance is that if you outlive the term of your policy, you receive a tax-free lump sum payment of all your premium payments. This can be a significant amount of money, making this type of policy more attractive to people who see life insurance as an added expense.

Risk-Free Investment

Another benefit of return of premium life insurance is that it is a risk-free investment. If you outlive the term of the policy, you get all your premiums back, making it a low-risk way to invest your money.

Option to Renew or Convert

Most return of premium life insurance policies give you the option to renew the policy at the end of the term or convert it into a permanent life insurance policy. This gives you flexibility in how you choose to use the policy and can be beneficial if your needs change over time.

Drawbacks of Return of Premium Life Insurance

Higher Premiums

One of the main drawbacks of return of premium life insurance is that the premiums are usually higher than those of traditional term life insurance policies. This is because of the added rider that guarantees the return of premiums if the policyholder outlives the term of the policy.

No Investment Component

Return of premium life insurance policies do not have an investment component to them, meaning that you do not earn any interest on your premium payments over the term of the policy. This makes it less attractive to those who want to grow their money over time.

Penalty for Early Cancellation

If you cancel your return of premium life insurance policy before the end of the term, you may be subject to a penalty. This penalty is usually a percentage of the premiums paid and can be significant.

FAQ

What happens if I die within the term of my return of premium life insurance policy?

If you die within the term of your return of premium life insurance policy, your beneficiaries will receive the death benefit named in your policy. The death benefit is usually tax-free and is paid out to your beneficiaries in a lump sum payment.

Can I borrow against my return of premium life insurance policy?

No, you cannot borrow against your return of premium life insurance policy. Unlike permanent life insurance policies, return of premium policies do not have a cash value component to them that you can borrow against.

What happens if I cancel my return of premium life insurance policy before the end of the term?

If you cancel your return of premium life insurance policy before the end of the term, you may be subject to a penalty. This penalty is usually a percentage of the premiums paid and can be significant.

Is return of premium life insurance right for me?

Return of premium life insurance may be right for you if you want a risk-free investment that guarantees you will get all your premium payments back if you outlive the term of the policy. However, it is important to weigh the benefits and drawbacks of this type of policy, as the premiums can be higher than those of traditional term life insurance policies.

In conclusion, return of premium life insurance can be a good option for those who want a risk-free investment and are willing to pay higher premiums. It is important to weigh the benefits and drawbacks of this type of policy and consider your personal needs and circumstances before making a decision.