Before you can find out if this policy is right for you, you need to know what is entailed with it so, what is a Return of Premium life insurance policy?
Return Of Premium Policies
It is all in the name and this policy is exactly what it says. It is a policy that may return all of the premiums that you have made into it at the end of the term if you are still alive. So, if you paid $100 a month for 10 years, you will have paid in $12,000. If you are alive at the end of the ten year term, you get the $12,000 back to you. It is also currently tax free since the money that you paid in is your money that you had already paid tax on.
If you die during the policy, it acts like an ordinary life insurance policy and your beneficiaries will receive a death benefit. In some ways, you get your cake and get to eat it to. You have the peace of mind of having a life insurance and if you outlive the policy, you wont have to worry about wasting your money, you get it back.
As with everything in life, there are good and bad things about everything. Starting with the good, this is what we have.
- Return Of The Premium.
Obviously, this is the best part of the policy and the reason that people choose it. You get every penny that you paid into the policy if you make all of your payments and live past the policy term.
- Works Similar To Traditional Policies
If you die during the term, your beneficiary still gets a death benefit just like with a regular life insurance policy. The policy premiums are, of course, not returned however.
- Forces You To Save
Since you have to make the payment every month, you can consider it a forced savings account. Sure, it doesn’t earn interest but it is still money that is being saved. Planning to retire at 65? Get a policy that expires when you turn 65 and get a big chunk of change handed to you on your 65th birthday.
Now, let’s take a look at the bad things about this type of policy. Things that might keep you from taking one out.
- Premiums Are Higher
Premiums will typically be higher than with a standard life insurance policy. You do not get something for nothing and if you want to get your money back at the end, you have to pay for that right. Insurers can offer these policies because a large portion of people will cancel their policies early. This subsidizes the ones who actually pay on time and outlive their policy term.
How much higher are premiums? Typically 30 percent or more above standard term life insurance. That could cost you an additional 300 dollars or more a year in premiums.
- No Money If You Cancel Early
If you surrender the policy early, you lose the premiums that you paid in. Some policies may allow you to receive some of the money back if you have paid for at leas a couple of years however. The longer that you have paid, the higher percentage that you may be able to recoup. If you want it all though, you must outlive the term.
- No Interest On Premiums
You may get your money back but there is no interest earned on it. This of course means that it is worth less than it was when you paid the premium. Think about how much less $1000 is worth now than it was ten or even 15 years ago.
- Policies May Be Limited
Chances are good that you find that there are a limited number of options available to you. Insurers may have only a limited number of terms and the coverage amounts may not cover as wide of a range as other policies.
- Premiums Not Paid Back If You Die
Let’s just be blunt, because we are talking about life insurance here. If you die before the policy ends, a benefit is paid just like a normal policy but the premiums are not paid back. This means that if you die during the term, you paid more for your policy than you would have with a conventional one. So, if you are not confident that you will outlive the term this is not the policy for you. Take a hard and truthful look at your health and the life expectancy in your family.
So, is a Return of Premium policy right for you? That is a decision that you have to make for yourself.
If you have the extra money to spend, 30-35% more than a traditional policy, and like the idea of getting your money back on something that you end up not needing, maybe. It is always nice to get a refund on something that you do not use.
If you are horrible at saving money and need a vehicle to help you save money that you can use during retirement, then maybe. Just remember that the money that you get back will have actually depreciated. It will not have earned a dime of appreciation to combat inflation.
If you are on a tight budget and need a policy that you can afford, probably not. You do not want to break the bank on a policy tat you can not afford, especially if it puts you in danger of missing a payment due to the cost.
If you are good at investing and can invest the money you save by getting a traditional insurance policy, probably not. You can probably do better by investing the money or saving it on your own.
If you are on the fence, you should consult an insurance agent and express your goals and any concerns that you might have. Remember, this article has been written for information purposes and is not legal advice.