Life insurance is designed to protect the financial future of those you care about, but that protection could also benefit you in the long-run. While there are many excellent Term Life Insurance policies available, Term with Return of Premium ensures you’ll receive 100% of your premiums back at the end of the term period if coverage is never used.
Let’s take a look at how it works…
You buy a return of premium term life insurance policy, perhaps for a 20- or 30-year term. If you die during that time, your beneficiaries receive the death benefit. If you outlive the policy, you get back exactly what you paid in (without interest). The money back is not taxable.
With a regular term life insurance policy, if you are still living when the policy expires, you get nothing back. The premium is set for the entire duration of the policy – it would not increase every year, but if you’re living at the end of the policy period, the policy ends and the premium paid is often viewed as a waste.
Return of premium policies are similar to a regular term life insurance policy, with the major exception that if you’re living at the end of the term period, you have two choices of what you can do with your policy.
- You could elect to take all the premium paid over the life of the policy in a lump sum payment (refund) from the insurance company; or
- You could choose to use that policy value (the accumulation of what you paid for the life of the term) to purchase a fully paid insurance coverage amount (referred to as the Paid-Up Insurance amount).
But everything has a price, right? The return of premium policy is a more expensive option, but some people would prefer to get their premium back if they’re still living at the end of the policy.
Let’s look at an example…
John is a 35 year old male. An average 30 year $250,000 term policy would cost John $290 annually. A return of premium term would cost $620 annually. John would have the same coverage for the same period of time, however at the end of his 30 year period, the standard term would have accrued no value. With the return of premium option, John could receive back all the premiums he paid – $18,600! If John is a dedicated investor, he may be able to invest the difference over time and come out ahead. However, the reality for most of us is that we would’t invest the money. And at the end of 30 years, we’d have a term policy with no value. The CDC life expectancy table for 2017 lists the overall average life expectancy of males across all races as 76.1. So, for John, the odds are in his favor that he will outlive the policy. The return of premium option will also allow John to continue with life coverage at the end of 30 years if needed. He can use the value he’s accumulated in his policy (the $18,600 previously mentioned) and purchase $43,500 in paid up life coverage. Or at age 65, he can have all the premiums he paid returned to him – his $18.600. As with anything, it’s always nice to have options and this is a good alternative for those wanting a term policy but still wanting some value.