Return of Premium Life Insurance
Are you interested in a term life insurance policy but don't like the idea of outliving the term length after paying premiums for years and years? Return of Premium life insurance gives you back all of the money you paid in, so long as you live beyond the expiration of its term. For example, if you purchase a 30-year policy and you pay premiums every year for 30 years, and you are still alive in year 31, you will will receive back all of your premiums, plus interest, tax-free.
Return of Premium Life Insurance vs. Traditional Term Insurance
The major difference between Return of Premium and regular term life insurance is, of course, that you get your money returned should you outlive your policy. Another difference is cost. Term life policies are the least expensive form of life insurance you can purchase. Return of Premium policies generally cost between 25% and 50% more than term life.
Return of Premium Life Insurance vs. Whole Life Insurance
The major difference between Return of Premium and whole life plans is what you get should you drop the plan before the expiration of its term. With whole life policies--the most expensive form of life insurance--if you drop your coverage before expiration, you get most of your premiums returned, minus administration fees. With a Return of Premium policy, if you drop the plan before its expiration, you will get only a small percentage of the money you have paid in. On average, what you get back ranges from 10% to 35%, depending on how long you have kept the coverage.
With all three policies, should you die while you are covered, your beneficiaries are paid the face value of your policy.
A Hypothetical Illustration
As an example, let's say you are interested in a policy with a face value of $250,000 and a term of 30 years. And let's say that the annual premium is $2,000 for a term policy, $2,600 for a Return of Premium policy (the cost of our theoretical term policy plus 30%), and $3,500 for a whole life policy. Should you die during years 1 through 30, term life would have been the best choice, followed by Return of Premium, and then whole life.
However, if you are alive in year 31, a term policy will have been the poorest choice financially: you will have paid $60,000 with nothing to show for it at the end. With a Return of Premium policy, you will have amassed $78,000 plus interest.
Compare Insurance Policies: Weigh Affordability and Coverage
There is no one "right" choice when buying life insurance; it all depends on your outlook, needs, and risk factors. Probably the best way to understand the options is to get quotes for each kind of policy. For each insurance company you speak with, get a quote for term life, whole life, and Return of Premium insurance policies that would result in the same benefit amount. Then create some "what if" scenarios with a calculator or spreadsheet to compare.
If you determine that Return of Premium is the best choice for you, request rate quotes from multiple carriers to be sure you are getting the best deal. Most companies can give you an estimate within 24 hours.
Lorraine Watkins is a freelance writer and a regular contributor to business and education websites. She holds an M.A. in English from California State University, East Bay.