Life Insurance with Return of Premium

Life Insurance with a return of premium rider has a death benefit that pays out in the event of the death of the insured in the same way as a traditional life policy, but also includes a return of premium feature. This feature is included for a more expensive premium than that of a traditional life insurance policy without the return of premium feature. Depending on age, health, and the amount of coverage being applied for, this could be a very affordable feature to add. Granted, the policy must be kept for a set number of years to be eligible for 100% return of premium (for term policies), which is usually the term duration selected for the policy. If the policy lapses or is cancelled prior to the required number of years to be eligible for 100% return of premium, either zero premium or a prorated amount of the premium will be paid to the insured based off the return of premium schedule disclosed by the insurer. This is because the insurer needs to make money by using the premiums as an interest free loan allowing the insurer to make a profit by either investing from their reserves each time you make the return of premium policy payment, or by not returning all or a portion of the premium paid if the policy lapses or is cancelled prior to the specified term agreed upon.

The pros of a term life policy with return of premium, for the insured, is that 100% of the premium will be paid back if the insured does not pass away or use any of the benefits of the policy during the term duration. With this, the insured will receive a check from the insurer for the full amount of premiums paid. It’s nice to know if you do not use your coverage, you will get the money you spent paid back to you. And since it is money you paid, it is not taxable. Now, the downside is that your money earns zero interest, and you won’t be able to recover 100% of the money you paid until you’ve reached the specified duration required for 100% return of premium.

The alternative to adding a return of premium rider would be to save or invest the money that would be required for a return of premium rider and just go with traditional term life insurance. Doing so gives you the flexibility to not save or invest if your budget ever gets too tight, and then return to saving and investing when your budget becomes more flexible. Although, most people don’t save or invest unless they’re forced to. So, a return of premium insurance policy would at least keep you on track if you would do better with a required scheduled payment to keep you accountable for saving.

Most whole life insurance policies will not include a return of premium, except for some guaranteed “no lapse” universal life policies (GUL). For GUL policies that offer this option, only partial return of premium will be allowed and only at specified years (for example: year 15, year 20, year 25). And just like traditional life insurance, guaranteed universal whole life (with return of premium) will be much more expensive compared to term policies with return of premium, because it is guaranteed to last your entire life with premiums that do not increase.