A return of premium term life insurance policy is a type of term life insurance that may refund the premiums paid if the policyholder outlives the policy term. Because of this refund feature, return of premium policies are generally more expensive than traditional term life insurance policies.
What Is Return of Premium Term Life Insurance?
Return of premium term life insurance is a type of term life insurance that provides a death benefit during the policy term and may return eligible premiums if the policyholder survives until the end of the policy term.
Typically, the premium and death benefit remain level throughout the policy term. However, premiums are usually higher than those of conventional level term insurance because of the potential refund feature.
Cash Value
Cash value is money that accumulates within certain permanent life insurance policies over time as premiums are paid. Unlike permanent life insurance, a return of premium term life insurance policy generally does not build cash value.
Instead, eligible premiums may be returned at the end of the policy term if the policyholder meets the requirements of the policy.
Premium
A premium is the amount a policyholder pays to an insurance company to maintain life insurance coverage.
With return of premium term life insurance, premiums are generally fixed throughout the policy term but may be higher than those of traditional term life insurance. The higher cost is partly associated with the possibility of receiving eligible premiums back if the policyholder outlives the coverage period.
Death Benefit
A death benefit is the amount paid to the policyholder's beneficiaries if the policyholder dies while the policy is active and the claim meets the policy requirements.
With return of premium term life insurance, the death benefit is generally fixed throughout the policy term. The amount of coverage depends on the policy selected and the insurance provider.
Coverage Length
Return of premium term life insurance policies may be available for different periods, commonly 10, 20, or 30 years, depending on the insurance provider and the policyholder's needs.
The exact coverage period and available options vary between insurance companies.
How Does Return of Premium Term Life Insurance Work?
Return of premium term life insurance can be offered as a standalone policy or, depending on the insurer, as an optional rider attached to a life insurance policy.
For example, a policy may provide coverage for 20 years. If the policyholder dies during the coverage period, the beneficiaries may receive the policy's death benefit, subject to the policy terms and conditions.
If the policyholder survives the entire term and meets the requirements for a premium refund, the insurer may return eligible premiums paid during the coverage period.
However, if the policyholder cancels the policy before the end of the term, the policy may provide only a partial refund or no refund at all, depending on the policy's terms.
Example of Return of Premium Term Life Insurance
Suppose John purchases a return of premium term life insurance policy that provides 20 years of coverage and a $20,000 death benefit. His annual premium is $500.
If John dies during the 20-year coverage period, his eligible beneficiaries may receive the $20,000 death benefit, subject to the policy's terms and conditions.
If John survives the entire 20-year policy term and qualifies for the premium refund, he may receive back the eligible premiums he paid.
In this example:
$500 annual premium × 20 years = $10,000
Therefore, John could receive $10,000 in returned premiums, assuming the policy provides a full refund and all requirements are met.
Benefits of Return of Premium Term Life Insurance
Return of premium term life insurance may offer several benefits, including:
- Potential premium refund: If the policyholder outlives the policy term and meets the requirements, eligible premiums may be returned.
- Life insurance protection: The policy provides a death benefit during the coverage period.
- Level premiums: Premiums are generally designed to remain consistent throughout the policy term.
- Financial planning option: It may appeal to people who want life insurance protection while also having the possibility of recovering eligible premiums at the end of the term.
Drawbacks of Return of Premium Term Life Insurance
Despite its potential benefits, return of premium term life insurance also has some disadvantages:
- Higher premiums: It generally costs more than traditional term life insurance.
- No guaranteed refund in every situation: The refund depends on the policy's terms and conditions.
- Limited flexibility: Cancelling the policy early may result in a partial refund or no refund.
- No cash value: Unlike permanent life insurance, return of premium term insurance generally does not accumulate cash value.
Conclusion
Return of premium term life insurance combines temporary life insurance protection with the potential to receive eligible premiums back if the policyholder survives the entire policy term. However, its premiums are generally higher than those of traditional term life insurance.
Before purchasing this type of policy, it is important to review the policy terms, refund conditions, premiums, coverage amount, and cancellation provisions to determine whether it meets your financial needs.