Are you looking for life insurance but don't want to spend a lot of money on it?
Or maybe you're worried about what would happen if you died and your loved ones had to pay the premiums themselves.
If either of those things are worrying you, return of premium life insurance might be the right choice for you. Keep reading to find out more about this type of policy and how it could benefit you.
Note: Return of premium life insurance does NOT exist in Canada. It is a US-specific product. Term life and permanent life insurance are good alternatives for Canadians looking for life insurance. Learn more here about which one can be right for you.
What is Return of Premium Life Insurance?
Return of premium life insurance (also known as return of term life insurance) is term life insurance plan with a difference. Like a traditional term policy, it lasts for a specific period. However, unlike a traditional term policy, return of premium insurance refunds all of the premiums paid into the policy if the policyholder survives the policy term.
The payout of a return of term life insurance is issued when the policy term expires and is subject to tax. And if you pass away during the term, a return of premium life policy will issue the death benefit to your beneficiaries just as a traditional term life plan would.
A return of a premium life plan is structured in one of the following two ways:
- You can buy a return of premium policy as a standalone financial product. That is, you will not need to add the rider separately
- You can buy a term life insurance policy and then add a return of premium rider
Return of premium can get complicated so, it is recommended to contact an advisor when considering it.
Regardless of how the policy is structured, one thing is for sure — the money-back feature can cost a pretty penny. You will have to pay significantly more than what you would pay for a base term policy.
How much more? The cost of return of premium rider depends on several factors, including your age, health classification, and choice of insurer. Generally speaking, return of premium insurance is two or three times the cost of a base term policy.
How Does Return of Premium Life Insurance Work?
You can add a return of premium rider to a traditional term life policy at the time of purchase. The money-back feature lasts for your policy term. Return of a premium life policy works in the following way:
- You make premium payments, monthly or annually, to maintain coverage. The insurer calculates your premium rates based on the policy amount, length of the term, age, health, and medical history.
- If you pass away during the term, the insurer will pay your beneficiaries a certain pre-defined amount, called the death benefit. A life insurance beneficiary is a person or people you name to receive the payout upon your death.
- If you survive the policy term, the insurer will refund all the money you paid into the policy without any interest. This income is taxable.
However, you will pay a considerable amount extra for this money-back feature. While premium rates are unique to the applicant, research shows a return of premium insurance policy can be two or three times costlier than a standard term life plan.
Pros and Cons of Return of Premiums
No financial product is perfect — and the same goes for the return of premium policy. It comes with its own set of benefits and drawbacks. Do the pros outweigh the cons? A life insurance policy needs are rarely one-size-fits-all. It will depend on your individual financial needs.
Pros of return of premium life insurance
Refunds premiums when the term ends
If you survive the return of term life insurance policy term, the insurer will refund all the premium dollars you paid, however, it is subject to tax.
Forces policyholders to save money
Let’s face it. Saving money is not easy. Many of us feel bad about spending too much, and yet we are unable to save enough. A forced savings vehicle can help break this cycle. You pay some money today and get more money back in a few years.
A return of premium policy is costlier than a traditional term life policy. But the upside is, if you survive the term, you will get back not only the extra money you paid for it but all of your premium dollars.
Costs less than whole life insurance
Return of premium is significantly cheaper than whole life insurance.
Cons of return of premium life insurance
Considerably more expensive than term life insurance
The money-back offer does not come cheap. You are likely to pay two to three times the cost of a basic term life policy.
The insurer will not pay interest on your premium dollars
You will get back what you paid. So, in a sense, it is like a personal loan to your insurer. After a certain period, the provider returns your money without interest. However, because of inflation, the value of the money returned to you is depreciated.
Canceling the policy mid-term might mean no refund
Generally, if you cancel the policy before its terms, you will not get any of your money back.
Return of premium is not a great way to save
Traditional investment accounts are likely to offer you a much better return than a return of premium policy.
Is Return of Premium Worth it?
A traditional term life insurance policy does not guarantee a payout. The insurer pays only if you pass away during the term. If you outlive a traditional term life insurance plan, there is no payout. This arrangement may seem unfair to some. They may be put off by the idea of paying thousands of dollars of premiums over the life of a policy without any guarantee of a payout.
Return of a premium life policy can be a good option for these buyers, especially if the extra cost is not an issue. However, if you are looking for an affordable term life insurance policy, it is not for you.
Receiving a substantial amount of money close to your retirement can be comforting. But, when you think about it, you are not getting any extra money.
The insurer is simply returning what you paid. Furthermore, if you had put this money into a traditional saving or investment account, you would have probably ended up with much more.
Here is an example:
Mark, a 40-year-old non-smoker, will have to pay $145 a year for a 20-year term life policy with a death benefit of $100,000. However, if he buys a return-of-premium policy for the same term and amount, the cost will jump to $499 a year. That is an increase of $354 annually.
Without the rider, Mark will pay $2,900 over the life of the policy. Adding it will bring the cost to $5,988.
Is the refund of premiums worth paying an additional $3,088 over 20 years? Perhaps not. Mark is likely to get a better return from traditional savings or investment accounts.
Because of the high costs, return of premium insurance might not be a great option for everyone. You may be better off using a standard term life policy to safeguard the financial security of your loved ones and investing in traditional investment accounts to save money for retirement.
A traditional term life policy pays out if you die within the term, not otherwise. By contrast, a return of term life insurance policy pays in both scenarios. If you pass on while the policy is active, your beneficiaries will receive the policy amount. If you are alive at the end of the term, you will get a full refund of your premium. However, these policies are a lot costlier than traditional term life policies and as such might not work well for everyone.
Although return of premium life insurance is not available in Canada, whether you're considering term or permanent life insurance, you can count on Dundas Life to help you find the best deal. We work with all top Canadian insurers and specialize in helping customers find a life insurance product that perfectly matches both their budget and long-term financial goals.
How do I compare return of premium life insurance policies?
There are a few things to consider when comparing return of premium life insurance policies. The most important thing to look at is the death benefit. This is the amount of money that the policy will pay out if the insured person dies. The death benefit is the most important thing to consider because it is the main reason people purchase life insurance.
Another thing to consider is the premium.
What riders can I add to my return of premium life insurance policy?
Assuming you are asking about adding additional coverage to an existing policy:
Most life insurance policies allow the policyholder to add additional riders, or coverage, to the policy. This is typically done to provide additional protection for the policyholder or their beneficiaries. An example of a rider that can be added to a life insurance policy is the accidental death benefit rider. This rider provides additional coverage in the event of the policyholder's death due to an accident.
How do I file a claim on my return of premium life insurance policy?
Assuming that you have a return of term life insurance policy, there are a few things that you need to do in order to file a claim. First, you need to contact the insurance company that issued the policy and let them know that you would like to file a claim. The insurance company will then send you a claim form, which you will need to fill out and return.
Once the insurance company has received your claim form, they will begin the process of investigating the claim.
What is the difference between return of premium life insurance and traditional life insurance?
The main difference between return of premium life insurance and traditional life insurance is that with return of premium life insurance, you will get all of your premiums back if you live to the end of the policy term. With traditional life insurance, the death benefit goes to your beneficiaries if you die during the policy term, but there is no cash value accumulation or return of premium feature.