Return of Premium Life Insurance: The Ultimate Guide
Posted in Life Insurance last updated on March 7, 2021Have you heard of Return of Premium life insurance? It sounds too good to be true.
The idea is that if you were to die while your term life insurance is still in force, your beneficiaries would receive the death benefit. But if you outlive your term life insurance, the insurance company will refund to you all the money you paid in premium. All 10, 20, or 30 years of premiums paid. Wow, right?
There’s got to be catch. Spoiler Alert: There is a better way. Click here to skip to the Return of Premium alternative.
Just want the rates? Click here for Instant Quotes.
Why is Return of Premium life insurance a thing?
I strongly believe that term life insurance is the proper type of life insurance for 90% of people. It provides maximum protection for minimal cost during the time of your life you need it most. A winning trifecta if I’ve ever heard one.
I do my best to make sure people understand the incredible value they are getting with these types of policies. But no matter how well I explain it to them, there is one recurring objection that comes up most often.
What happens when the term expires? I just pay all that money for 20 years and then I get nothing in the end?
Well, you get to be alive! That’s definitely something.
When people buy car insurance, they’re happy to avoid accidents and not need to use their car insurance. When they buy home insurance, they’re very pleased that their house hasn’t burned down and they haven’t had to use their homeowners insurance.
But life insurance…no. They don’t want to pay for it if they aren’t going to use it.
Is there some death wish life insurance customers have that I don’t know about?
It turns out this is such a common objection in the life insurance industry that insurance companies had to come up with a solution. They turned to the geeks with the green visors and arm bands sitting in the basement for an answer.
“Let’s just give them their money back.”
– Geeks in basement
That was easy.
What is this Return of Premium life insurance sorcery?
The geeks in the basement are not stupid. They don’t just give money away so I’m going to get this out of the way first.
Return of Premium life insurance is expensive. Really, really expensive when compared to a normal term life insurance policy.
Don’t believe me? Here are a few Return of Premium rates compared to traditional term life insurance.
These are sample monthly premiums for a 40 year old Male with Standard rates. Your premiums will vary as they are determined by underwriting factors including age, health, family history and more.
| Term & Coverage | Return of Premium Life | Traditional Term Life |
|---|---|---|
| 20 Year $100,000 | $107.25 | $17.65 |
| 30 Year $100,000 | $78.50 | $29.24 |
| 20 Year $200,000 | $209.15 | $30.14 |
| 30 Year $200,000 | $151.66 | $53.32 |
| 20 Year $300,000 | $311.06 | $37.65 |
| 30 Year $300,000 | $224.81 | $63.42 |
I told you.
I know what you’re thinking. “It doesn’t really matter if it’s more expensive. I’m going to get the money back in the end anyway.”
Not always. In fact, most of the time you won’t get your money back. That’s one of the many catches that come with Return of Premium life insurance. Let’s look at others.
What’s the catch?
Catch #1. You have to complete the term.
In order for Return of Premium life insurance to actually return your premiums, you have to make ALL your payments during the 10, 20, or 30 years. That is very unlikely to happen.
In fact, 40% of life insurance policies lapse within 10 years. There are many reasons for that:
– Needs change. As you get older, the main reasons for buying life insurance may no longer be there. Kids have made their way through college. The mortgage is paid off. Maybe a spouse has passed away.
– Payments are no longer affordable. Inflation means that the cost of living goes up each and every year. Over time, those expenses may eat away at your budget and unfortunately, life insurance is an easy place to cut costs.
– Many people replace their term life insurance. Whether it be a change of needs, affordability, or some other reason, the fact is many people replace their current life insurance policy.
If your Return of Premium life insurance policy doesn’t reach the end of its term, you’ll lose the premiums you have paid in up to that point.
Catch #2. Return of Premium life insurance policies don’t earn interest.
Imagine putting your money in a savings account for 10, 20, or even 30 years only in the end to get back the same amount of money you put in.
Sounds like a raw deal but that’s exactly what happens.
You may be surprised to hear that Return of Premium life insurance plans offer zero percent interest.
Of course you had life insurance coverage during the term but that seems to be of little consolation to those expecting growth on their money.
Catch #3. If you die during the term, you would have overspent dramatically on your term life insurance policy.
If the main reason you’re buying life insurance is to provide protection during the term you selected, then a tradition term policy is going to be a much less expensive option. See the sample rate table above.
Catch #4. You must be healthy enough to qualify.
Admittedly, this is a catch for most life insurance policies but it’s important to remember. Life insurance companies set their rates and acceptability based on your health, lifestyle, and family history.
If you aren’t healthy enough to qualify for traditional life insurance, you can still qualify for Guaranteed Issue life insurance.
Catch #5. You must do a medical exam.
Life insurance is one of the few things you’ll ever buy where you’ll receive physical discomfort and even pain, just for the privilege of making a purchase.
Most Return of Premium life insurance policies will require a medical exam complete with a blood and urine test.
If that’s something you’re unwilling to go through, take a look at life insurance without a medical exam.
Alternatives to Return of Premium life insurance
Alternative #1. Buy traditional Term and invest the difference.
One of the “catches” of Return of Premium life insurance listed above is that your money doesn’t earn interest so what’s the alternative?
A popular strategy is to instead buy a traditional term life insurance policy for much less money and invest the savings.
Let’s take a look once again at the savings you would have available to invest:
| Term & Coverage | Return of Premium Life | Traditional Term Life |
|---|---|---|
| 20 Year $100,000 | $107.25 | $17.65 |
| 30 Year $100,000 | $78.50 | $29.24 |
| 20 Year $200,000 | $209.15 | $30.14 |
| 30 Year $200,000 | $151.66 | $53.32 |
| 20 Year $300,000 | $311.06 | $37.65 |
| 30 Year $300,000 | $224.81 | $63.42 |
Now let’s take a look at how much you could earn on that money over 10, 20, or 30 years:
| Term & Coverage | Return of Premium Refund | Savings Invested at 4% |
|---|---|---|
| 20 Year $100,000 | $25,740.00 | $32,972.55 |
| 30 Year $100,000 | $28,260.00 | $34,302.84 |
| 20 Year $200,000 | $50,196.00 | $65,875.18 |
| 30 Year $200,000 | $54,597.60 | $68,480.33 |
| 20 Year $300,000 | $74,654.40 | $100,614.12 |
| 30 Year $300,000 | $80,931.60 | $112,386.01 |
It’s easy to see how much better you could do if you were disciplined enough to actually invest your savings each month. The key here is discipline. Do you have the discipline to invest your savings month after month?
If the answer is “Yes”, this alternative is definitely the way to go.
Alternative #2. Guaranteed Universal Life Insurance (My Personal Favorite)
For those of you who aren’t disciplined enough to consistently invest the traditional term savings, or who still just like the concept behind of Return of Premium life insurance, there is another great alternative, my personal favorite.
Guaranteed Universal Life with a Return of Premium Rider.
This type of policy has something for everyone.
Guaranteed Universal Life Insurance is a universal life policy that guarantees the death benefit for a certain amount of time long past what traditional term life insurance policies offer. In fact, these policies can last until age 90, 95, 100, all the way up through age 121.
Return of Premium option. A Guaranteed Universal Life insurance policy can have a Return of Premium rider attached. This rider allows you to get most or all of your premiums back at year 15, 20, or 25.
Living Benefits. Life insurance is no longer just for protecting your family against your untimely death. With Living Benefits riders (sometimes called Accelerated Death Benefit riders), you can be protected against Critical Illness, Chronic Illness, and Terminal Illness.
These riders can pay a portion of the death benefit while you’re still living if you are diagnosed with a terminal, critical, or chronic illness.
On top of all these great benefits, Guaranteed Universal Life insurance premiums are still lower than traditional Return Of Premium life insurance.
Conclusion
Return of Premium life insurance is a great concept in theory. Unfortunately, there are a lot of things that make Return of Premium life insurance unattractive.
Consider buying traditional term life insurance and investing the difference or getting a Guaranteed Universal Life insurance policy with a Return of Premium rider.
Whatever you decide, remember, like planting a tree, the best time to get life insurance was 10 years ago. The second best time is TODAY.
