What is Return of Premium Life Insurance?

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Contributor, Benzinga
February 7, 2022

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Always been under the impression that if you outlive your term life insurance policy, you get nothing in return? While that’s true for standard, or level, term life policies, there is a type of term life insurance where after the term is done, you do get something in return. 

With a return of premiums policy, if you outlive the term of your life insurance, your premiums are returned to you. Learn more now with Benzinga’s guide to return of premium life insurance.

What is Return of Premium Life Insurance?

Life insurance rates are calculated in monthly premiums. While permanent insurance policies like whole and universal life carry with them a cash value, term life insurance does not. Like renting a house opposed to owning one, all your monthly payments sink into a black hole once they’re paid. If you outlive your policy, there’s no cash payback.

This holds true 99% of the time. There is one type of term life insurance that gives your money back even if you outlive the policy. It’s called return of premium life insurance, and while not one of the more popular types of term life insurance, it does return your premiums in the end.

So why doesn’t everyone jump at the chance of having a return of premium policy? Because it’s expensive. Very expensive. The conventional thinking is: why sock that extra money away in a term life policy, letting the insurance company collect all the dividends when you can invest the extra money yourself? Good point.

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Key Points

  • Insurance companies offering this type of insurance are few
  • Cost can be as high as three times more than a standard term life policy
  • Why not just invest the difference yourself?

While premiums for a term life policy aren’t tax deductible, when it comes to a return of premium policy, the refunded premiums you get at the end of your policy are tax free. If you outlive the life of your policy, the returned premiums act like their own little savings account. 

And while there is no growth equity (hence the tax-free status), you do get the advantage of why you bought the policy in the first place: to have life insurance. And while it’s expensive, it’s still cheaper than a whole life policy.

How it works

One reason you may not have ever heard of a return of premium life insurance is that it's not a standalone policy. It’s a rider added to a standard term life policy and can run as long as the term of the policy itself, typically between 10 and 30 years.

Here’s how it works: Just like with any insurance policy, you apply, get approved, and then you pay your monthly premiums. As long as the premiums are paid, the policy is in force. 

If you die while the policy is active, your beneficiaries cash in. If you outlive the term of your policy, however, what makes this policy different is that you get all the premiums you paid back tax-free because there was no profit. 

You have to outlive, or complete, the term of the policy to get your premiums back. If you cancel the policy before the end of its term, there is no refund.

Is a return of premium life insurance policy right for you?

If you’ve got extra money and you feel you need that extra little nudge to get you to save it, then a return of premium policy isn’t a bad option for you. It’s not the only option, but once you’re knee-deep into the policy, it forces you to keep squirreling money away. 

With a regular savings account, no one is forcing you to make those monthly deposits. True, there’s no financial growth. In fact, when you factor in inflation, you’re actually losing money. But if it’s the life insurance policy that’s your main goal, and you’d like someone to twist your arm to put money away at the same time, it’s not a bad deal.

Think of it like this. Just pretend that you’ve got a standard term life policy and you make your payments for 30 years. Then, all of a sudden — maybe it’s time for you to retire — someone sends you a big check out of the blue, tax-free! If you like the way that sounds, then a return of premium life insurance policy could be right for you.

Pros and Cons of Return of Premium Life Insurance

Everything has its pros and cons. With life insurance, you usually find your benefits at one end and drawbacks at the other. Let’s break down the pros and cons of return of premium life insurance.

Pros

  • Great forced savings vehicle
  • Premiums refunded if you outlive the policy
  • Refunded premiums are tax free
  • Costs less than whole or universal life
  • Protection of a life insurance policy

Cons

  • No equity growth
  • More expensive than standard term life policy
  • Must outlive the policy to receive the refund
  • Actual losses when factoring-in inflation
  • Harder to find coverage

Who Should Consider Return of Premium Life Insurance?

If you’re looking into buying life insurance but don’t want the high price tag of a whole or universal life policy, then term life is the answer. Remember, rates are always lower when you’re young, and it’s the best time to lock them in.

If you don’t like the idea of all that money paid in premiums just disappearing if you outlive your policy, then return of premium life insurance might be just the ticket for you. Term life insurance is more expensive when you add a return of premium rider, but if you’re young, rates may not be too out of reach. Rates for young people are most always affordable, and the idea of receiving a refund on your premiums long before you retire sounds inviting. 

Compare Life Insurance

If you’re interested in a return of premium life insurance rider for your term life insurance, you’re going to have to do some digging. Not all insurance companies offer this particular rider. Let the insurance experts at Benzinga help find the right policy for you.

  • securely through Wysh Life Insurance's website
    securely through Wysh Life Insurance's website
    Best For:
    Those Under 50 Years Old
    Rating:
    Read Review
  • securely through Ladder Life Insurance's website
    securely through Ladder Life Insurance's website
    Best For:
    Adjustable coverage
    Rating:
    Read Review

    Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers – for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products. Coverage amounts vary by state.

  • Best For:
    Under Age 64
    Rating:
    Read Review

    Haven Term is a Term Life Insurance Policy (ICC21 Haven Term in certain states, including NC) issued by C.M. Life Insurance Company (C.M. Life), Enfield, CT 06082. In New York (DTC-NY) and California (DTC-CA), it is issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001.

  • securely through Fabric Life Insurance's website
    securely through Fabric Life Insurance's website
    Best For:
    Young families
    Rating:
    Read Review
  • securely through Bestow Life Insurance's website
    securely through Bestow Life Insurance's website
    Best For:
    Term life insurance
    Rating:
    Read Review

    *excludes New York

  • securely through Sproutt Life's website
    securely through Sproutt Life's website
    Best For:
    People with healthy lifestyles
    Rating:
    Read Review

Frequently Asked Questions

Q

Is a return of premium on life insurance taxable?

A

Return of premium life insurance is essentially a rider on a standard term life policy. Of course, all that money you pay into premiums is not subject to taxation. But what about the money you get back at the end of the term? The good news is, that money is tax free. The reason it’s not taxed is that there was no profit. Financial gains on a whole or universal life policy are tax-deferred, but you do have to pay taxes on gain when you cash it in.

Q

What are the rates on return of premium life insurance?

A

While return of premium life insurance policies are great when you outlive them, while they’re in force the rates are considerably higher. You’ll pay as much as two to three times more every month for the privilege of receiving a refund on your premiums. But it’s cheaper than a whole life policy, and if you need to save some money anyway, it’s not a bad financial vehicle.

Methodology

Benzinga crafted a specific methodology to rank life insurance. To see a comprehensive breakdown of our methodology, please visit our Life Insurance Methodology page.

About Philip Loyd, Licensed Insurance Agent

Loyd has written for Forbes.com, Red News Real Estate, Therapist.com, IRA.com, McGraw Hill, TheStreet.com, WikiHow, GOBankingRates.com, S.R. Education, Society of Petroleum Engineers and BioTech Fortunes. He is a licensed insurance agent and financial advisor with both his series 6 and 7 certifications.