Life insurance can play a key role in protecting your loved ones from financial stress when you die. Your beneficiaries will receive the policy’s death benefit as a lump-sum cash payment that is generally free from federal income tax. Those policy benefits can be used to help ensure your loved ones have the funds they need to pay your final expenses, debts, and continue their standard of living even after you are no longer there to financially contribute.
However, with so many different types of life insurance and policy options, it can be overwhelming and confusing to try to choose the right policy. One option you may not have considered is a return of premium life insurance policy.
We’ve put together a list of the questions our agents hear most frequently about return of premium coverage to help you make a more informed decision.
Return of premium life insurance is essentially term life insurance , with a twist. Just like traditional term insurance, you purchase a policy for a fixed number of years (such as 10, 20 or 30 years.) You pay the insurance company a fixed amount every month or every year to keep the policy in force. If you die while the policy is in force, the insurance company pays your beneficiaries the benefits specified in the policy.
With a traditional term insurance policy, when your coverage ends, you don’t have anything to show for it (other than having had insurance coverage for the entire policy term.) With return of premium coverage, the insurance company will give you back the entire amount paid in as policy premiums at the end of the policy term.
Let’s say you paid $100/month for your term insurance policy for 20 years. With a return of premium policy, that means you’ve paid a total of $24,000. If you keep the policy in force and are still living at the end of the policy term, the insurance company will pay YOU $24,000 – essentially refunding the exact amount you paid in over the years.
Some insurance companies treat the return of premium account as a cash value account, allowing policyholders to take policy loans or withdrawals during the policy period. In this way, return of premium policies are like universal life policies.
Although some insurers treat the return of premium account as a cash value account, this type of policy is still term insurance. You only have coverage for a specific period of time (the specified policy term.)
Pros: The biggest benefit of return of premium life insurance is that it offers something at the end of the policy term. With ordinary term insurance, you are essentially renting coverage for a fixed period. Just like paying car insurance or homeowners insurance, you have coverage for the policy period, but you don’t get any benefit from not filing a claim against the insurance. Return of premium life insurance gives you your money back if you don’t use the insurance.
Cons: You can expect to pay higher premiums for return of premium coverage, compared to term insurance – as much as two or three times the cost of traditional term coverage. You also don’t earn any interest on your money. However, remember that you’ll get everything you paid back at the end of the policy term if you don’t end up needing the coverage.
Some insurance companies require a minimum amount of coverage, like $100,000, and require full underwriting for return of premium policies.
The answer to this question will depend on the insurance company and the specific details in your insurance policy.
With some insurance carriers, you must carry the policy until its term to get your premiums back. Other policies may provide prorated benefits if you decide to cancel the policy before it ends. Always review your policy carefully to understand your rights and obligations.
In many cases you can convert your return of premium policy to permanent coverage. This can be a helpful option if your insurance needs to change after you purchase the policy. Check your insurance policy or ask your agent to help you understand whether a policy you are considering includes conversion rights.
Your Symmetry Financial Group Independent Insurance Agent is a great resource to help you understand how various types of life insurance work. Your agent will also work closely with you to help you determine how much life insurance you need and what type of policy (or policies) will best meet your needs and goals.
To learn more and to request a quote, contact us today.