How Does Return of Premium Life Insurance Work?

July 30, 2018

Normally, you can’t return your insurance policy. If you can’t use it, you lose the premiums, end of story. In the case of life insurance, it’s a good thing that you didn’t have to use it – that means you are still here! One type of insurance sets itself apart though. It’s called return of premium life insurance.

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Keep reading to learn how it works.

The Basics

You pay premiums for return of premium life insurance, just like you would any other term life insurance policy. Let’s say you bought a policy with a 20-year term. If you outlive those 20 years, you get the money back that you paid. While you don’t get paid interest on the money, you also don’t have to pay taxes on the income.

What’s the catch? You’ll pay a lot more for those premiums. What you would normally pay for a term life insurance policy, you can multiply times three – that’s how much a return of premium life insurance policy could cost you.

The Benefits of Return of Premium Life Insurance

You might wonder why anyone would want to pay more for life insurance than they have to. Are there really any benefits? Honestly, it’s like a gamble. If you take out an insurance policy and don’t use it, you get your money back. If you use it (meaning you die), your beneficiaries receive payment and your policy paid off in the end.

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That’s really the only benefit, but for some people, it’s benefit enough to do it. These clients feel better knowing that they will get their money back if they are still alive. In their eyes, they aren’t throwing money out the window, so to speak.

The Downsides of Return of Premium Life Insurance

The largest disadvantage is obviously the cost of the policy. You will pay a lot more money for the same coverage you could get with a term life insurance policy. Plus, to make matters worse, you don’t earn interest on the money. If you were to invest the same money, you would likely increase your net worth quite a bit, but instead, you invest it in an interest-free investment vehicle.

Finally, there are usually strict terms regarding when you can get your money back. For most policies, you have to have the policy for the entire term. If you cancel earlier than the maturity date, you forfeit the premiums you paid. You can also forfeit your return if you miss payments or default on the policy.

Read the Fine Print

The most important thing we can tell you regarding return of premium life insurance is to read the fine print. Each insurance company offers a different twist on the policy. Many insurance companies don’t even offer the policy. If you are intent on paying for this type of policy, make sure you will get the return that you intended.

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