What's the true cost of a return of premium life insurance policy?

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What's the true cost of a return of premium life insurance policy?

We all like money-back guarantees, right?

"If you’re not 100% satisfied, get your money back!"

It’s the reason I just ordered a Casper pillow: I have 100 nights to sleep on it and see how it feels. They have great reviews, and I’m sure I’ll like it, but just in case…

But what if you could get your money back even on a product that you’re completely satisfied with? And you could get it all back after 20 full years.

That’s the deal with return of premium life insurance. But is it worth the cost? And just what is the cost, anyway? We take a look to find out if a return of premium life insurance policy right for you.

What is a return of premium life insurance policy?

First, the basics of how term life insurance works: You buy a term life insurance policy for a death benefit of a specific dollar amount and a specific length of time – the term. If you pass away over the course of the term, your beneficiaries receive the death benefit. If you outlive the term of the policy, then you don’t receive anything in return.

Of course, in that second scenario, you’re still alive, so that has to count for something.

Some people might see this as a "waste of money." After all, there aren’t many things where you put money forward and get nothing back. But you are getting something back from your insurance policy: Financial security, peace of mind, and a future for your loved ones if the worst happens to you.

Insurance – all insurance – is tricky because it’s something you buy that you never actually want to use.

A return of premium life insurance policy is a special type of term policy. You pay into it just like you would any other policy, but at the end of the term, your premiums are returned to you. (I know what you’re thinking: How did they come up with that catchy name for this policy type? We may never know.) Minus certain fees, which are usually negligible in the scheme of things, you’ll come out of the policy as financially well off as you were going in.

If that seems too good to be true and you think there’s a catch, you’re right. Return of premium plans cost more than a comparable standard term life insurance policy. But is it really all that much more? Let’s see some real life quote samples from both so you can be the judge of if return of premium life insurance policies are worth the cost.

Life insurance cost comparison

We’ll use a pretty straightforward example for this. Our sample quotes are going to be for a 30-year-old male and female, both healthy non-smokers, and both looking at 20-year-term policies at $500,000 of coverage. This will make a good comparison for the return of premium rider: After 20 years, our sample applicants will only be 50 years old, meaning it’s likely that they’ll have outlived their coverage. It makes more sense than getting quotes for, say, 70-year-old applicants. They’re less likely to be needing that return of premium feature.

So for our standard term life insurance applicants, we can get rates starting at:

  • 20-year/$500,000 policy for a 30-year-old healthy non-smoker male: $20.37
  • 20-year/$500,000 policy for a 30-year-old healthy non-smoker female: $17.93

For a return of premium life insurance policy, our applicants are looking at rates starting at:

  • 20-year/$500,000 policy for a 30-year-old healthy non-smoker male: $91.21
  • 20-year/$500,000 policy for a 30-year-old healthy non-smoker female: $75.80

So, as you can see, it can be pretty pricey to upgrade from a traditional term life insurance policy to a return of premium policy. You’ll get your money back down the line, but you’ll need to budget for the extra expense in the meantime.

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

So, you’ll have a big decision to make: Pay extra to have your premiums returned, or pay less for a traditional policy?

First, it’ll depend on what your life insurance budget looks like. Take the example above – it’s probably a lot easier for most women to swing $18 a month compared to $75. Your decision might be made for you if a traditional term life insurance policy is what you can afford.

Second, if you can afford a return of premium policy, you’ll have to decide if you want to. Let’s say you’re a woman who can afford $75.80 a month; you’d get around $18,100 back when the term is up. But if you bought a traditional term policy at $17.93 a month, that’s a total difference of around $13,800. That’s $13,800 that you could have been doing something else with over those 20 years – namely, investing it in mutual funds, an IRA, or a 529 college savings plan. That money will not have gained any interest as part of your life insurance policy, so there’s an opportunity cost to tying it up there rather than investing it.

But let’s say you’re actually not that great with money. A return of premium life insurance policy can act as a forced savings vehicle. You could potentially have an extra $13,800, but you know you’d blow most of that on burritos and trips to Iceland. In this case, the money you’d get back at the end of your policy’s term with a return of premium policy would be a nice boon.

So the choice is yours. It’s like a choose your own adventure book, but the stakes are your financial future rather than stumbling across a mummy’s tomb (I guess; I haven’t read one of those books in a while). Now that you know what a return of premium policy rider is, what the costs look like, and how to decide if it’s the right decision for you, get free quotes or talk to one of our licensed experts to find out how you can apply for your policy today.