Return of Premium Rider For Term Life Insurance When It Expires And You Don’t Die
Term life insurance is often the most cost-effective solution to protect your family’s finances should you pass away unexpectedly.
Unfortunately, many people don’t like what happens to term life insurance when you don’t die and the policy expires.
In a standard term life insurance policy, you get nothing when the policy expires and you no longer have life insurance.
To many:
This seems like a waste of money.
You’re still alive, which is a good thing, but you get nothing back.
The idea behind term life insurance is you can build up enough assets during your policy period. If you do this, you’ll no longer need life insurance after it expires.
However, some people would rather pay more and get something back after their policy expires.
A return of premium rider could be what you’re looking for.
Here’s what you need to know and how it works.
Standard Term Life Insurance When You Don’t Die
Many people don’t like one particular aspect of standard term life insurance that makes it seem like a waste of money.
That’s what happens to standard term life insurance when you don’t die.
Unlike return of premium term life insurance, standard term life insurance pays you nothing when you don’t die during the term.
The policy expires and nothing is paid out.
While this seems like a bummer, it honestly isn’t.
It must be said:
The fact that you’ve outlived your term is good. You’re still alive.
The money you pay for term life insurance helps provide for your family in the unfortunate event you pass away during the policy. You don’t want this to happen.
If you do die, though, the money could be used to cover your funeral costs. It can also help replace your income until your family finds another income source.
Build savings along the way
During the policy period, your goal should be to build up enough assets to where you no longer need life insurance.
Paying the premiums was simply a way to mitigate risk just in case you died early.
Once you save enough to provide for your family, you no longer need life insurance.
If this happens before the end of your policy term, you could cancel the policy and quit paying premiums.
What Is Return of Premium Life Insurance?
Return of premium life insurance is generally a term life insurance policy with a return of premium rider.
A rider, such as the return of premium rider, is an extra part of the policy added to a standard policy.
Getting this type of life insurance policy requires going through the same process as a regular term life insurance policy.
You’ll input information, get a quote, fill out a health questionnaire and likely take part in a medical exam. If you’re in good health, your rates for life insurance coverage are typically lower than those in less than ideal health.
The return of premium rider allows you to get all of the premiums you paid into the policy back at the end of the term.
Now:
For this rider to work, you must not die during the term.
You also have to follow the rules of the policy. If you don’t pay the premiums, the policy could expire and result in losing out on the benefit.
Since you’re getting back the amount you put in without any extra interest, the return of premiums is usually tax-free.
The catch
You’ll pay higher premiums for a term life insurance policy with a return of premium rider.
You can expect to pay roughly 30% to 50% more for the return of premium rider.
How Return of Premium Term Life Insurance Works
The way this type of insurance works isn’t hard to understand.
The life insurance company would normally charge you one rate for life insurance alone.
Premiums
The rate covers their costs should you die during the policy and your beneficiaries receive their death benefit payouts.
To be able to return your premiums at the end of the term, the life insurance company increases the premium. This extra premium is invested.
When you consider most term life insurance policies last 10, 20 or 30 years, you must realize that’s a long period where you could be investing your higher premium payments.
At the end of the term of the policy, the life insurance company will likely have made more than enough money from investing the extra premiums to pay you back all of the premiums you paid.
Most likely, they’ll still earn a profit, too.
This should cause you to rethink this type of insurance.
why?
If you simply take the difference in premium and successfully invest it, you may be able to earn much more than you would receive if your premiums were returned.
Investing is uncertain, though. Nothing is guaranteed and you could end up with less money than if you had purchased a return of premium life insurance policy.
Benefits
Forced savings
Return of premium life insurance can offer a way of forced saving, much like paying off a mortgage, for those that can’t seem to hold on to money.
By paying the life insurance company your premiums, you’re keeping your life insurance in effect. You’re also setting aside money for the future.
At the end of the policy term, you get all of the premiums back that you had paid in without any interest or appreciation.
Tax-free
Another benefit of this payback is the tax-free aspect.
When you get a lump sum of income, it is often taxable.
This isn’t the case with return of premium life insurance payouts.
Mentally, getting your premium back can help you think of this type of life insurance as a win-win scenario.
You get both life insurance and your money back at the end of the policy.
Drawbacks
More expensive
Return of premium life insurance isn’t usually a great deal.
It’s more expensive than standard term life insurance and it still expires at the end of the term.
Not widely available
Standard term life insurance is extremely common. Unfortunately, the return of premium rider isn’t as widely available.
You may be limited to certain insurers if you must have a return of premium life insurance policy.
Limited options generally mean less competition and higher prices.
Inflation
While you do get your premiums back, the money could be worth significantly less at the end of the term, thanks to compounding inflation.
If you invest the difference in premiums between return of premium life insurance and standard term life insurance, you might be shocked at how much you’d have at the end of the term.
Even with a conservative 5% annual return on the difference between standard and return of premium term life insurance, your growth may exceed the return of all of your premiums at the end of the policy.
Consider Your Life Insurance Options Carefully Based on Your Goals
Whenever you’re buying anything, you should consider how it helps you meet your goals. This includes life insurance.
If your goal is to provide for your family should you pass away early, term life insurance is likely what you need.
In rare cases, return of premium or permanent life insurance may be suitable, as well.
That said:
If you want money at the end of your policy, you should look at how investing could compare to return of premium life insurance. A return of premium may seem like a lot of money, but investing over the long term of the policy often results in much more money.
It is rarely, if ever, a good idea to combine life insurance and investing. Doing so results in extra fees and lower returns in most cases.
After all, the insurer is taking on the risk and must charge a fee to do so.
For this reason, return of premium life insurance isn’t usually the best choice to help you meet your goals.
Consult an Expert
Consulting an expert can help make your life insurance decision easier. Before you stop at your life insurance agent’s office, first consider how they’re paid.
Life insurance agents are often paid commissions based on the policies they sell you.
Certain life insurance, such as permanent life insurance and universal life insurance, are normally more expensive and offer higher commissions to life insurance agents. Even return of premium term life insurance costs more than standard term life insurance.
Even return of premium term life insurance costs more than standard term life insurance.
That means:
Your insurance agent may be influenced to sell you a policy you don’t need if it comes with a higher commission.
Instead, consider consulting a fiduciary financial advisor. You’ll have to pay this advisor for advice. There are no conflicts of interest, though, because they only receive payment from you and not from commissions.
A fiduciary financial advisor can consider your unique financial situation. Then, they can recommend the best type of life insurance for you.
They can also explain how you may be better off opting for a standard term life insurance policy as long as you invest the difference in premium payments.
