If you outlive your life insurance policy, can you get your premiums back? In most cases, the answer is no. However, a return of premium life insurance policy is the exception. This life insurance product allows policyholders to collect a refund of the premiums they have paid. This can sound very appealing, but before you buy life insurance, it’s important to understand the pros and cons of return of premium life coverage, as well as your alternatives.
Return of Premium Life Insurance vs. Traditional Term Life Insurance
Return of premium life insurance, or ROP life insurance, is a type of term life insurance policy. Like other term life insurance policies, it is written to cover a specified period of time. The length of this term can vary considerably. For example, it may be five years, 10 years, 20 years or 30 years. If the insured dies during this time, the insurance company pays the death benefit to the beneficiary under the terms of the policy. At the end of the term, the policy expires. Sometimes, the policyholder may renew coverage or convert it into another type of life insurance policy. If no action is taken, however, coverage ends.
During the period of coverage, the policyholder needs to pay premiums. These premiums are the cost of purchasing insurance. If there is no claim – i.e., if the insured outlives the policy term – then no death benefit is paid.
Normally, the insurance company keeps the premiums even if no claim is made. However, return of premium term life insurance is different than regular term life insurance in this regard. If there is no claim, the policyholder can receive a refund of the premiums paid.
How does return of premium life insurance work?
Let’s say you decide to buy return of premium life insurance. You purchase a 20-year policy. For 20 years, you pay your premiums. Thankfully, you survive. At the end of the term, you can qualify for a return of the premiums paid.
According to the Insurance Information Institute, some return of premium policies refund the entire premium amount, including the base premium and the extra premium for the return of benefit coverage. However, some only return the extra premium. It’s important to look closely at the terms offered by various different life insurance companies.
The Pros of Return of Premium Life Insurance Policies
To a policyholder who spent years paying premiums and received nothing in return, life insurance may seem like a bad investment in hindsight. Of course, this is how insurance normally works. You carry insurance in case something goes wrong, but you hope that it never does. Certainly, when most people buy term life insurance coverage, they’re hoping to outlive their policy. They buy coverage anyway because they want to make sure that their loved ones will be provided for no matter what.
At the same time, the opportunity to get your premiums back is an attractive proposition. If the policy provides a refund of 100 percent of the premiums, you are not losing any money at all. And while you’ll have to budget in order to afford the premiums during the period of coverage, the return that you receive can boost your savings. You can build this into your retirement plans.
The Cons of Return of Premium Life Insurance
At this point, you might be thinking that there has to be a catch. If there were no downsides, everyone would purchase return of premium insurance.
There are some cons, and the main one is the cost.
Regular term life insurance is attractive to many people because of its affordability. Premiums are often very low, and an applicant who’s young and healthy might be able to secure a policy worth $250,000 to $500,000 for around $20 a month or less.
Return of premium term life insurance is more expensive. You may get some or all of that money back, but in the meantime, you’re going to have to budget for higher premiums. If you need coverage but can’t afford a pricy policy, this might not be a good option for you.
This is something to consider carefully. If you can’t afford the high premium payments, you could end up losing your money. The policy terms may state that you need to keep the policy in force for the entire period in order to qualify for a return of premium. If the policy is cancelled early due to nonpayment, you may not be able to get anything back. You’ll also be without life insurance coverage.
Even if you can afford the higher premium payments, you may be better off investing the difference. Depending on the investment strategy you use, you could receive higher returns this way. On the other hand, if the investment strategy produces poor results, you could lose money.
Alternatives to Return of Premium Life Coverage
Regular term life insurance is a common alternative to ROP life insurance. If you’re looking for an affordable life insurance policy to give you peace of mind that your family will be taken care of, term life insurance is a great option.
If you can afford higher premiums, you might also consider permanent life insurance options, including whole life insurance and universal life insurance. Unlike term life insurance, permanent life insurance policies never expire. They also accrue a cash value, and the policyholder can access this value in various ways, for example, by borrowing from the policy. These policies tend to have much more expensive premiums compared to regular term life insurance policies, but some people find them worthwhile because of the investment aspects on top of the death benefit.
Should you buy return of premium life insurance?
Life insurance is a smart investment for many people. However, deciding on the right type of life insurance policy to meet your needs can be more difficult. Before you buy ROP life insurance, ask yourself the following questions:
- Will you be able to afford the higher premiums for the full length of the policy? If you don’t think you’ll be able to keep the policy in force, you may be better off with a less expensive type of term life insurance.
- Does the policy offer a return of 100 percent of the premiums or only of a portion of the premiums? Policy terms vary, and these differences can have a big impact on the value and usefulness of the policy, so it’s important to read the fine print.
- Do you think you could get a better return by investing the difference in cost elsewhere? Instead of paying for a more expensive ROP policy, another option is to purchase a regular term life insurance policy and then invest some money.
- Would a permanent life insurance policy better meet your needs? If you’re looking for a life insurance options with an investment element, permanent life insurance might be a good fit.
Are you still not sure whether you should buy a return of premium life insurance policy? Navigating your life insurance options can be overwhelming, but you don’t have to make these decisions on your own. Higginbotham offers a wide range of life insurance products, including term and permanent life insurance policies. We can help you find a policy that meets your specific needs.