Return Of Premium Term Life Insurance

No one would suggest that buying life insurance is a mistake, but the many who do buy it aren’t completely informed about all life insurance options. When we’re not completely informed, we can make mistakes. Mistakes cost money and this one could cost you tens of thousands of dollars out of your pocket.

Life insurance 101 - Most people would say that there are only two primary types of life insurance. In fact, most insurance providers only offer two types of life insurance; whole and term life insurance. We see numerous commercials on television and ads online for just these two types of protective coverage.

At its most basic, whole-life or permanent insurance pays out to your beneficiaries when you pass away. The most common form of whole-life insurance pays out based on your selected coverage. You’ll pay a premium on this value. As you age, your risk level increases and your premium should increase in tandem. This would make insurance expensive and beyond the reach of most as they age, so insurance providers balance the cost of your premium by charging you higher payments earlier and smaller payments later through the term of your policy.

Term life insurance is the most common and the simplest form of life insurance. This kind of policy only pays out if you pass away during the term of the policy. Frequently policies have 10, 20 or 30-year terms. Because there’s not a guaranteed payout by the insurance provider and, therefore, the policy-holder may outlive the policy, the risk to the insurance provider is lower. Thus, term life insurance premiums are lower. You’ll often hear commercials highlighting the low cost of term life insurance.

A Newer Kid On The Block - Return of premium term life insurance is easy to understand. It’s like the term life insurance policy mentioned above, except when the 10, 20 or 30 years of the policy are up, and if you haven’t passed away, you’ll usually get your money paid back to you. Return of premium term life insurance is like a long-term savings plan that protects you from the financial risks associated with death. In fact, a return of premium term life, “is like getting a free life insurance policy while saving. If you pass away the policy will pay out. If you don't you got a good little nest-egg of savings.”

Pros Of Return Of Premium Term Life Insurance - The primary benefit of a return of premium policy is the return of either all or some of your funds if you, as the policyholder if you don’t pass away. Many see this benefit as a return on investment compared to traditional term life insurance or savings accounts. The secondary benefit is that the cost of a return of premium policy is more affordable than whole-life insurance. This makes life insurance more accessible for lower wage earners such as women, members of the queer community or other marginalized communities who find it harder to get life insurance.

For these communities, it avails the opportunity to leave a financial legacy by naming a non-spousal beneficiary, which is of vital importance to many in the queer community, most of whom don’t have children.

Cons Of Return Of Premium Term Life Insurance - The main con with a return of premium term life insurance, unlike whole life insurance, is the additional cost compared to traditional term life insurance. Typically, the return of premium life insurance cost is approximately 30% more than term life insurance. This may put life insurance beyond the reach of your budget.

Additionally, with a return of premium term life insurance policy, you must keep your policy active until the end of the agreed term to get your return of premium. This means you’re locked into your policy for 10, 20 or even 30 years, contingent on the term you choose, which makes return of premium term life insurance a long-term commitment to funding your life insurance. If you don’t think you can fulfill this contingency, then going with a lower cost term life insurance policy may be a better fit.

Finally, you won’t earn interest on the premium that’s returned to you with a return of premium term life insurance, which means that, due to inflation, the return value of your policy will shrink.

Not all insurance providers offer a return of premium life insurance policy. These policies cost the provider more because they don’t capture all the premium as income compared to traditional term life insurance.