Return of premium life insurance is a type of term life insurance, meaning it’s a policy that lasts a set period of time and then expires. Unlike other forms of term life insurance, however, return of premium offers opportunity to receive your money back at the end of the term.
Here is how it works:
- Return of premium life insurance, sometimes referred to as a “rider” or add-on to a standard term life insurance policy, is sold for a set term—usually 10, 20 or 30 years.
- The policyholder makes monthly or annual payments, called “premiums,” to keep the policy in force.
- If the policyholder dies while the policy is in force, a pre-set cash payment called a “death benefit” will be paid out to the beneficiaries named in the policy. The larger the amount of coverage, the more the premiums will cost.
- If the policyholder outlives the term, 100% of the premiums paid over the course of the policy are refunded tax-free to the policyholder at the end of the term.
Is a “Return of Premium” rider right for me?
Whether or not a return of premium life insurance policy is worth it depends on your individual financial situation and goals. Receiving a sizable chunk of money when you’re at or nearing retirement is nice, especially if you don’t have to pay taxes on it. But you have to consider you’re really just getting back money you already put in. It’s not extra money; it’s money that was already yours. It’s also money that’s lost out on years of compound interest, so it’s worth less than it would have been if it was invested.
Getting a premium refund tax-free is enticing. After all, a lot of our financial decisions revolve around lessening our tax burden. But you shouldn’t let that blind you to the flip side of a return of premium policy. You have to take into account not just the tax implications, but the upfront cost (higher premiums) and opportunity costs (missing out on better investment vehicles) that come with them.
A return of premium life insurance policy can work for someone who can afford paying a little extra each month and wants a relatively low cost forced savings vehicle, but may not be right for someone who just needs a basic term life insurance policy to protect their family and is more budget-sensitive. If you’re needing more information, please fill out the contact section on our site and we will touch base shortly.