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Return of Premium Life Insurance – A new idea in life insurance

08/25/2006

Return of premium life insurance can be an appealing alternative to term life insurance for people who have a strong sense that they can maintain their premium payment for the complete length of their policy whether that’s 15, 20 or 30 years.

What’s the basis of an insurance company returning premium for this kind of life insurance?

When you purchase term life insurance you set up a low outlay for a certain length of time. If at the end of the time period of the term, what you’ve paid in is not recoverable. Return of premium term life insurance is unique in that you have term life insurance for the years of the policy and if you maintain it for that time then the life insurance company gives you back the entirety of the payments you made.

How come the insurance company would do this? To start with, the amount you pay for this kind of policy is more than term life insurance for those same years. Also, a fair number of people do not maintain their insurance and drop it. As a result the company has taken in more than they would have taken in with a regular term insurance policy. The insurance company retains that overpayment. This assists them in giving those that maintain their return of premium policies their repayment.

Additionally, whole life or universal life builds cash value. In a way, this is similar to a return rider because money can come back to you if you cancel these kind of permanent life insurance policies. One of the key pluses to a permanent policy like whole life is that it is guaranteed to be there for the rest of your life no matter how long you live. These can also grow substantially in cash values plus the interest on whole life and universal life grows tax deferred. The number one drawback – permanent life insurance is higher in the amount of money you need to outlay compared to term – especially in the early years and more than return of premium life insurance as well.

One way to figure out if return of premium is a good choice is to compare the premium for a return of premium insurance plan and compare it to what you would have paid for term life insurance for the same number of years. Calculate the difference between the two in annual payment; compare it to the amount that is given back at the end. Using a financial calculator you can seen what the rate of return will be on the increased amount you paid.

There is a Forbes article on return of premium that can be helpful to learn more.

One important thing to keep in mind: If you're not confident that you you’ll be able to maintain the payments on this kind of policy then opt for term instead of return of premium insurance or a permanent policy.

 

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