We’re often asked how can an insurance company guarantee to give you back all the money you paid for the policy at the end of the term period (15, 20 0r 30 years) on a return of premium life insurance policy?
Here’s how it’s done: The premium for a return of premium term life policy is higher than the amount you’d pay for just term life insurance for the same period of time. Because the life insurance company has charged more than they need to pay for claims and expenses the balance can be invested by the insurance company.
The insurance company actuary (an insurance accountant) takes into consideration the amount of interest that the company can make during the period on the excess premium. Also, some people, because of circumstances, may not keep their policies and will therefore not get the refund. Their excess payments go back to the company. Because they don’t keep their policy and you do, that helps lower what the insurance company charges. It’s interesting that the refund you receive at the end of the term is tax free since it’s equal to what you put in.
One piece of advice I’d give on return of premium is similar to advice on whole life insurance: Don’t get it unless you’re very confident that you’ll be able to keep the policy until the term period is up. If you’re not that sure, then go with a traditional term life insurance policy.