Return of Premium Life Insurance

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It used to be that someone on a fairly limited budget could buy some term life insurance and provide financial security for their loved ones at a very reasonable price. Insurance companies tend to like term life policies because they are typically purchased by people 35 or younger, have a limited coverage period, and the average lifespan is hovering near the mid to late 70’s for either sex. Basically, term life insurance policies are not typically redeemed as there is no guarantee of death benefit payout to beneficiaries like in permanent life insurance policies (such as whole, universal, or variable). However, Return of Premium life insurance policies are term insurance coverage that is always redeemed, live or die.

Comparing the Cost

In addition to the limited duration of the policy, the other main reason why term life insurance policies tend to be so much cheaper than a permanent policy is because there is no investment or cash value component. Permanent life insurance policies, however, are more expensive because there is an investment component where the insured pays money in addition to the cost of maintaining the insurance coverage—and this additional money builds value because it is invested in various insurance investment funds that are designed to mimic mutual funds.

Return of Premium policies, however, are actually term because they can be purchased in specified blocks of time. However, a Return of Premium term life insurance policy tends to be 25-60% more expensive than traditional term coverage. This is because that additional money is invested in the same manner as on whole or variable life insurance policies.

Benefits

The basic premise of a Return of Premium life insurance policy is that the insured is betting that they live beyond the length of the policy. If a person were to buy a 30-year Return of Premium policy, then they might pay in $10,000 per year but they would get all of that money back if they lived beyond the expiration of the coverage. Some people believe that Return of Premium policies are like getting term coverage for free because they get all the money paid into the policy back.

Disadvantages

Insurance companies love this new variety of term life insurance because it literally encourages a healthier lifestyle while encouraging those with the coverage to save and invest. However, there are critics who contend that Return of Premium is an expensive add-on to regular term insurance and that it tends to be marketed to those who really can’t afford the extra expense. If the coverage lapses, then the policy expires and in many cases the insured may lose the money they had built-up.

Pricing

Pricing is a little confusing if you have already done some research into normal term life insurance plans. Normally, a person aged 35 could buy a 10-year term life plan with $500,000 of coverage at a lower rate than if they were pricing a policy for 20 or 30 years. However, with a Return of Premium plan, a 10-year policy would actually be more expensive because it takes longer for the investments to build value. Because all of the money that is paid into the policy is returned if it expires unused, the insurance company must charge a greater amount beyond the cost of the insurance in order to build up the investment capital quicker.

Premiums

Monthly premiums tend to go down when buying longer term Return of Premium life insurance policies and though more expensive than typical term coverage, they are very popular. People hate the idea of buying anything that they will likely never need, and term life insurance certainly fits into that category. Insurance companies love writing term policies because they know the odds are in their favor that no payout will ever take place. However, since buyers are guaranteed to get a payout at the end of the term when buying Return of premium insurance policies, this variety of coverage has become very popular and is expected to become even more so in the future.

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