What is a Return of Premium?
A return of premium is an optional rider added to term life insurance policies that stipulates that if the insured outlives the policy term, the life insurance company will return the premiums the policy owner has paid to them. Return of premium policies generally cost more.
Return of premium term life insurance
You can purchase a return of premium term life insurance, which essentially adds the return of premium rider to your policy. That rider says that if the insured doesn’t die within the policy term, the insurance company will pay back the premiums they have collected to you.
This can be enticing to people who like the low cost of term life insurance but are wary of the potential to get nothing should they outlive the policy term. To clarify, term life insurance is coverage with set parameters (like the policy’s premium) that last for the specified term (e.g., 20 years, 30 years). At the end of the term, the policy owner can keep the coverage, but the life insurer can make adjustments. Alternatively, they may have the option to convert the term policy into a permanent one. In either case, though, the policy owner will generally see a significant increase in the policy premiums.
Faced with the heightened cost, many people instead choose to surrender coverage.
That essentially leaves them empty-handed with nothing to show for the premiums they paid throughout the policy term. A return of premium policy negates that risk, ensuring that they’ll get that investment back.
Eligibility for return of premiums
In order to get your premiums returned to you at the end of the policy term, you need to have maintained the coverage through the entire term, which means continually paying your premiums on time. If you decide to cancel coverage partway through the term, you will most likely only get a portion of the premiums refunded, not the full amount you paid into the policy.
Assuming that you qualify for the return of premiums, the money you get back from the life insurance company isn’t taxed.
The high cost of return of premium insurance
But there’s a significant con with return of premium term insurance: it’s generally dramatically more expensive than other term policies. It can cost twice or even three times as much.
Some people see return of premium life insurance as a forced saving vehicle, but the money you get back will be depreciated because of inflation. Plus, had you invested the money you paid in premiums elsewhere, you would have been able to see a better rate of return on it.