Return of Premium Life Insurance: What Is It and Is It Right for You?
By , Finance Writer & Licensed Insurance Agent
Return of premium life insurance is a type of living benefit rider available on some life insurance policies. With return of premium life insurance, your insurance company will refund your paid premiums when the policy ends if you outlive the policy term.
Sometimes, return of premium life insurance is a better option than standard term life insurance. Although it’s more expensive than regular term life insurance, it costs less than whole life insurance and provides a tax-free premium return.
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Key Takeaways
Return of premium life insurance is a life insurance policy rider that refunds paid premiums if the insured outlives the coverage period. This living benefit is life insurance you can use while alive.
Adding a return of premium rider to another life insurance policy can increase the policy cost substantially but guarantees that you receive your paid premiums back.
Most people can invest the cost of the rider elsewhere and get a better return than they would through a return of premium. Because of this, return of premium life insurance is best for consumers with a low risk tolerance, high income and maxed-out savings.
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What Is Return of Premium Life Insurance?
Return of premium life insurance is a life insurance rider that refunds paid life insurance premiums back to the policyholder if the insured outlives the coverage term of their policy. This feature is usually available as a term life insurance policy rider. The example below illustrates how return of premium life insurance can work.
Let’s say a life insurance quote for a 30-year, $250,000 term life insurance policy costs $600 per year, and adding a return of premium rider increases the life insurance policy cost to $1,000 per year. Over 30 years, you’ll pay $18,000 without the rider and $30,000 with it. If you take the rider and outlive your policy, you’ll get your full $30,000 back. If you don't purchase the return of premium rider and you outlive the policy term, you’ll get nothing back when the policy ends.
Term life insurance is typically relatively inexpensive because the insurance company only pays out the policy if you die while the policy is in force. If you outlive the policy, you get nothing in return.
However, if you add a rider for return of premium life insurance, the life insurance company will have to pay out your policy at the end of its term, regardless of whether you live or die. If you live past your policy term, the insurer has to pay back your premiums. If you die, the carrier will pay the death benefit amount to your beneficiary. That’s why return of premium life insurance tends to cost substantially more than a standard term life insurance policy.
A life insurance rider is a feature you can add to customize your life insurance policy and provide greater protection. In addition to a return of premium life insurance rider, you can also include riders with other living benefits, like a chronic, critical or terminal illness rider or a long-term care rider. Other life insurance riders include child or spouse term coverage, premium disability waiver and guaranteed insurability. While some riders may be provided automatically at no cost, most riders cost extra, including the return of premium life insurance rider.
Advantages and Potential Drawbacks of Return of Premium Life Insurance
Here's a breakdown of this insurance type's advantages and disadvantages to guide your decision-making.
Advantages
- Guaranteed Premium Return: If you outlive your policy term, you get all your premiums back.
- Tax-Free Returns: The money returned at the end of the term is usually not subject to taxes.
- Living Benefits: Some return of premium policies offer additional riders like critical illness benefits.
Potential Drawbacks
- Higher Premiums: Return of premium policies generally cost more than traditional term life insurance.
- Limited Coverage: Due to higher costs, you may not be able to afford as much coverage as you need.
- Policy Restrictions: Some policies have conditions that could limit the return of premiums, such as missing a payment.
Understanding the pros and cons of return of premium life insurance can help you make an informed financial decision.
How Does Return of Premium Life Insurance Work?
The return of premium life insurance rider works by returning paid premiums to you if you are still alive when your life insurance policy term is over. If you decide to buy return of premium life insurance, it’s important to calculate how much the company will return to you. Some policies may not include fees, interest and premiums for other riders in the calculation. To be eligible for a premium return, you must pay all prior premiums in full before the policy period ends.
You get back what you paid for the policy
The insurance company will return the premiums you paid into the policy, including the extra cost of the return of premium rider. However, this return payment may not include interest, fees, and other rider premiums. For example, if you also purchase a child term rider, the cost for that rider won’t be included in your return of premium policy.
It tends to make your policy significantly more expensive
Adding a return of premium ride to a life insurance policy can double your premiums. Getting multiple quotes from different carriers can help you find the cheapest price for return of premium life insurance.
It’s available as a rider
A standard life insurance policy does not provide a return of premium; that means that if you outlive your policy, you don’t get any money back when the policy term ends. Return of premium life insurance is generally only available as a rider on select policy types and only through some insurance companies.
It can be added to term life insurance policies
Most companies only offer return of premium on a term life insurance policy. It’s usually available as a rider, but some companies, like State Farm, offer it automatically on its return of premium term life insurance policy. Less often, you’ll find the return of premium living benefit option in a permanent life insurance policy. For example, Nationwide offers the return or premium option on its no-lapse guarantee universal life insurance policy.
Who Benefits Most From Life Insurance With Return of Premium?
Return of premium life insurance can be expensive and may not be economically beneficial for most individuals. It may be best to purchase a traditional term life insurance policy and invest the money you save by not buying the return of premium rider.
For some people, life insurance with return of premium life insurance is worth it. If you have a high income with a low risk tolerance, only need temporary coverage and you’ve maxed out your other savings accounts, a life insurance policy with a return of premium rider may be worth it. We expand on these potential scenarios below.
You have a high income
Since return of premium life insurance can be expensive compared to standard life insurance, it’s best for people with higher incomes who can afford to wait many years to get their money back. Low-income earners may be better off purchasing a cheaper term life insurance policy and saving or investing the money they save by not buying a return of premium policy.
You only need temporary coverage
Term life insurance is best for temporary needs, like a mortgage, car loan or student loan. You know you’ll pay these debts off in the future, unlike permanent needs such as final expenses or funeral costs. Since you will pay the debt in full by the time the life insurance policy ends, it may make sense to get some money back with a return of premium rider.
You’ve maxed out your savings accounts
If you’ve already maxed out your savings and retirement accounts, the return of premium life insurance policy can act as another savings vehicle. Not only could you outlive the policy, but you could also outlive your retirement income. Having your paid premiums available at the end of the policy can help supplement your retirement account and make it last longer.
You have a low risk tolerance
Some people have a high tolerance for financial risk, but others don’t. If you have a low tolerance for financial risk, then it might make sense to place your money in a safe place, like a return of premium life insurance policy. For risky investors, a low-risk option like a return of premium rider comes at a potentially huge opportunity cost, as the growth potential could be much higher if their money were invested elsewhere.
Shopping for life insurance can be overwhelming, with so many companies to choose from. MoneyGeek analyzed dozens of carriers to narrow down some of the best term life insurance companies. From the company with the best rates to carriers with superior customer service to coverage for seniors and those who want no-medical exam life insurance policy options, these companies stand out above the rest.
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Return of Premium Rider: Factors to Consider
Deciding whether to add a return of premium rider to your term life insurance involves several considerations. Here are some factors to weigh:
Cost
Adding a return of premium rider will increase your premium payments. Calculate the long-term financial impact of this added cost. Will the guaranteed return of premiums at the end of the term justify this extra expense? Additionally, you must ensure this rider aligns with your overall financial planning.
Term Length
The length of the insurance term can impact the value you get from a return of premium rider. Longer terms, such as 20 or 30 years, will result in a larger sum of premiums returned if you outlive the policy. However, longer terms also mean a longer commitment to higher premiums. Weigh the term length against your life stage and financial goals.
Investment Alternatives
Compare the guaranteed return of a return of premium rider with the potential returns from other investments to make an informed decision. You may use the additional cost of this rider in other financial instruments like stocks, bonds or mutual funds. While these alternatives might offer higher returns, they come with varying levels of risk, unlike the guaranteed return from a return of premium rider.
Tax Implications
The returned premiums from this rider are generally not subject to federal income taxes. However, tax laws vary by state, and some specific conditions might trigger a taxable event. Consulting a tax advisor can clarify any potential tax obligations or benefits you might incur.
Financial Stability
Assess your long-term financial stability before making a decision. Your ability to consistently make higher premium payments over the term of the policy is important. If you anticipate significant financial changes, such as a career switch or large expenses like a home purchase, the added cost of a return of premium rider may become burdensome.
Alternatives to Return of Premium Life Insurance
Choosing the right life insurance policy involves considering various options. While return of premium life insurance has its merits, there are alternative paths worth exploring. Here's a look at some of the options:
Traditional Term Life Insurance
This straightforward form of life insurance offers a death benefit for a specified term, usually 10, 20 or 30 years. There's no return of premiums, but the premiums are generally lower. This allows you to invest the difference elsewhere for potentially higher returns.
Whole Life Insurance
Whole life insurance provides coverage for your entire life as long as you pay your premiums. It also includes a cash value component that grows over time, and you can borrow against it. While premiums are higher, the lifelong coverage and investment component make it a comprehensive financial tool.
Universal Life Insurance
This flexible form of permanent life insurance allows you to adjust your premium payments and death benefits within certain limits. Universal life insurance also has a cash value that earns interest, offering another avenue for financial growth.
Variable Life Insurance
Variable life insurance combines death protection with an investment component. You can allocate your premiums among various investment options, such as mutual funds. While this offers the potential for higher returns, it also comes with increased risk due to market fluctuations.
Indexed Universal Life Insurance
This policy ties the cash value component to a market index, like the S&P 500. Indexed universal life insurance offers more growth potential than a standard universal life policy but with less risk compared to variable life insurance. However, there's usually a cap on the returns you can earn.
No-Medical Exam Life Insurance
This type of insurance eliminates the need for a medical exam, making the application process quicker and less invasive. While convenient, these policies often come with higher premiums and lower coverage limits. They're best suited for individuals who have health conditions that might make traditional policies prohibitively expensive.
Frequently Asked Questions
Return of premium life insurance is just one type of life insurance policy to consider purchasing. Check out some of the most commonly asked questions about life insurance with return of premium below to help you decide if this policy fits your needs.
About Mandy Sleight, Licensed Insurance Agent
