Term life insurance is easy to understand. It offer affordable protection for as long as you need it.
It’s no wonder, then, that it is the right fit for most people. However, there’s one downside: term life insurance doesn’t pay out if outlive the policy's term length.
If you don't like the idea of paying premiums toward a policy that may never pay, there are insurance options.
Money back life insurance is a type of life insurance that pays money back to the policy owner. In the United States, you have the option of adding the return of premium (ROP) rider to your base term life plan. It ensures you receive the money you pay in premiums with interest at the end of the term.
In Canada and the US, you can buy whole or universal life insurance, both of which pay out no matter what. These policies also build cash value, which you can access at any time while still living.
Let's dive into the details.
- Money back life insurance is a type of life insurance that can pay you out while you're alive
- Applicants in the US can purchase a return of premium rider to receive back the money they paid into the policy
- Other option for those who want a policy that pays back upon cancellation are whole life insurance and universal life insurance
How does money back life insurance work?
In the United States, money back life insurance is term life insurance with elements of whole life insurance. Like a regular term life plan, it provides life insurance coverage for a specific period. But on top of that, it offers guaranteed returns if you outlive the policy term. In other words, it combines temporary coverage with a savings element.
Alongside life insurance protection, you can receive returns at regular intervals. When the policy term ends, you receive a survival benefit and the death benefit less the amount that has already been paid to you in the form of regular payments. If you pass during the policy term, your beneficiaries get the death benefit.
The table below highlights the main differences between term life insurance and money back life insurance.
Money back life insurance is quite popular in India and some other countries, including the US. However, this type of money back coverage is not available in Canada. If the idea of a term life policy that pays you back at the end of the term appeals to you, consider adding a return of premium rider to your term life plan.
What is the return of premium (ROP) rider?
The return of premium rider allows you to receive the premium paid at the end of the policy term. It can be added to a standard term life plan and lasts for the entire policy term.
Here’s how the ROP rider works:
- You make regular premium payments to keep the plan in force
- If you pass while the policy is active, the insurer pays the death benefit to your beneficiaries
- If you survive the policy term, it returns the money paid in premiums to you
- Depending on the insurance company, you may or may not get a refund of the premiums paid when you cancel the policy
- Some return of premium policies pay back all of the premiums paid by you, while others give only a partial refund
Long story short, a return of premium policy pays out no matter what. It provides a death benefit to your loved ones if you die during the term and refunds the premiums if you don’t.
However, the assurance of payment during or at the end of the term doesn’t come cheap. On average, return of premium policies are two to three times more expensive than a standard term life plan. Because of the high cost, they are not always the best option. You may be better off purchasing a normal term life plan and investing the difference in a traditional investment or savings account.
Pros of a Return of Premium rider
- Premium refunds are tax-free
- Can act as a forced savings vehicle if you survive the term
- Is less expensive than permanent life insurance with cash value
Cons of a Return of Premium rider
- Costs much more than basic term life insurance
- You may be able to get better returns by investing the extra money in traditional investment accounts
- Choices are limited, which may make it more difficult to find a coverage that perfectly matches your needs
Types of life insurance with cash back
Canadian life insurers do not sell traditional money back life insurance, but they do offer options that combine life insurance coverage with a savings element.
Apart from the return of premium rider, permanent life insurance can be an option for those who want a policy that includes benefits for both the beneficiary and policyholder.
Here’s how permanent life insurance work:
- You make regular premium payments to keep the policy in force
- Your policy provides coverage for as long as you live and also includes a savings component
- Part of the premium payments goes toward the in-built savings account, called the cash value
- Your policy’s cash value grows at a tax deferred basis
- You can tap into the cash value at any time while living and use the money however you like
- If you cancel the policy, you receive its cash surrender value (accumulated cash value minus surrender charges)
- In most cases, unused cash value goes to the insurer at the insured’s death, and not the policy beneficiary
Whole life insurance and universal life insurance are two of the most common types of permanent life insurance plans. Both offer lifelong insurance protection and cash value, but there are also key differences.
Whole life insurance grows in cash value at a fixed rate and may pay dividends. Your premium rate and death benefit remains the same throughout.
In contrast, universal life plans accumulate cash value at a varied rate. Cash value growth is tied to the performance of various sub-accounts. Universal life policies do not pay dividends, but offer some degree of flexibility as far as the premium payments are concerned. You can raise or lower your premium payments within limits as your circumstances change.
When does buying money back insurance make sense?
Term life insurance plans that pay a cash benefit regardless of when you pass are more expensive than basic term life insurance. Buying such a policy may make sense for those who don’t mind paying extra each month for a term life policy that also acts as a low-cost savings vehicle.
Receiving a sizable sum at the end of the policy term may look appealing, but you will just be receiving the money you paid to the insurer. Factor in inflation and you can see money back life insurance for what it is: an interest-free loan that you provide to the insurer.
For most people, a better option is to buy term life insurance and invest the extra funds in a traditional investment account.
Money back life insurance is a cross between pure term life insurance and permanent life insurance with cash value. It provides coverage for a set period of time but grows cash value, which the insurer pays to you at regular intervals. However, traditional money back life insurance is not sold in Canada.
If you are looking to buy term life insurance, but don’t like the fact that the policy may never pay out, consider buying the return of premium rider. It ensures that if you survive the policy term, the insurer will refund the premiums you paid. While a return of premium rider significantly increases your costs, it is not as expensive as whole or universal life insurance.
Not sure which type of life insurance policy will work best for you? Or how can you secure the lowest-possible rate? Don’t worry, Dundas Life has got your back. Drop us an email or book a call and one of our representatives will guide you through all the options and help you compare quotes from multiple top-rated Canadian insurers.
Frequently Asked Questions
What happens to the cash value when I pass away?
The cash value is for the policy owner. In most cases, if there’s any unused cash value, it goes to the insurance provider — not the beneficiary.
What is the difference between money back life insurance and term life insurance?
Term life insurance has a single goal: To provide your family with financial assistance when you pass. Money back life insurance, on the other hand, not only provides a financial safety net for your loved ones but also includes a savings element, refunding a part of the premiums paid to you at regular intervals.
Are the premiums higher for money back life insurance compared to term life insurance?
Yes, money back life insurance policies cost more than regular term life insurance plans. For instance, return of premium (ROP) plans in Canada can cost two or three times more than basic term life policies. Return of Premium isn't offered by all Canadian insurance plans, either, so whole life or universal life insurance is usually a better option.
What is cash value life insurance?
Cash value life insurance is a broad term used for different types of life insurance that include a cash value account. Whole life and universal life insurance are the two most common types of cash value life insurance. Both combine death benefit with the cash value, which grows on a tax-deferred basis. As the policy owner, you can access the cash value at any time.
Most people use the cash value to supplement their retirement income, meet a financial emergency, or fund a big purchase.
Is return of premium life insurance a good option?
Like with most things in life, the answer is: It depends. Return of premium life insurance is two to three times more expensive than comparable term life plans. So it may be an option for those who can afford the extra cost and are looking for a low-cost forced savings vehicle.
Getting back the money you paid in premiums over the course of your policy, which can be a sizable amount, can be an appealing option, more so if it’s tax-free. But in reality you’re just receiving the money you paid to the insurer. If you take inflation into account, you will actually receive less money back since the refund is interest free.
A better option would be to buy a regular term life insurance and invest the extra money you would pay for a ROP rider in a traditional investment account.
Do I need to undergo a medical exam to qualify for cash value life insurance?
Generally, life insurance companies require a medical exam, including a physical and blood test. The results of the medical exam, along with your medical history, enable life insurers to get a full picture of your overall health. Equipped with this knowledge, they are able to offer you a premium rate that appropriately represents the level of risk you present.
You can buy permanent life insurance without a medical exam. Many life insurance companies offer policies with simplified underwriting. These policies let you skip the medical exam, but they are usually pricier than fully underwritten plans and have smaller death benefits.
Is there any tax implications associated with receiving the money back benefit?
If you are in Canada, you cannot buy traditional money back life insurance. You can sometimes buy a return of premium or cash value life insurance plan if you want a policy with a savings component. A return of premium policy pays back the premiums paid at the end of the policy term. You receive this money tax free.
The cash value, on the other hand, can be accessed at any time, but there may be tax implications, depending on how you access it and how much. A policy loan, for instance, is not subject to tax as long as the policy is active. Cash value withdrawal, whether partial or full, is subject to taxation. Specifically speaking, you will pay tax on the amount that exceeds the adjusted cost basis (ACB) of your policy. The ACB equals the premium paid less the net cost of pure insurance.