One of the benefits of a permanent life insurance policy (whole life or universal life) is that, in addition to providing a death benefit, it can also accumulate a cash value, which can be accessed in later policy years. Term life insurance, on the other hand, provides only a death benefit. For those who don’t want permanent life insurance and don’t want to pay years of term life premiums without any return (if one outlives the policy), there is a solution. Return of premium term life insurance is term life insurance with the added benefit of a return of all premiums paid at the end of the policy term, provided you outlive the policy.
This benefit, however, doesn’t come without a cost – these policies are more expensive than traditional term life policies. For those in their twenties and early thirties, the added cost of these policies might not be too significant and, therefore, this might be an excellent option for this group. For people older than this group, the difference between this type of policy and regular term are often great enough to make this product a not-so-attractive option.
Many of our clients choose this type of policy for their mortgage insurance needs. You can purchase a policy with a term equal to the length of your mortgage (10, 15, 20 or 30 years) and at the end of the term, your mortgage will be paid off and (if you outlive the policy) you will have the added bonus of a lump-sum payment of all the premiums you paid for the policy. If you don’t survive the policy, it will do as it was intended to do – pay off the mortgage so your family won’t have to worry about continuing the mortgage payments.
At LifeInsure, we’re strong believers that term insurance may be the best life insurance for the majority of people. It offers an appropriate financial safety net at a budget-friendly cost and is clear-cut, so you understand precisely what you’re getting. We also feel that return of premium life insurance is a policy that some people should consider.
Return of premium life insurance might be a good term life insurance option for some people. Return of premium does just what it declares: when the term of the insurance policy is complete, all the premiums are returned to the insurance policyholder. It’s more costly than a conventional term life policy because it comes with a money-back guarantee.
Another well-known alternative is whole life insurance, a form of permanent life insurance that remains in force for as long as the insurance policy holder pays his or her premiums. It’s also more costly than term life insurance —by a significant amount.
Individuals who may want more than a standard term life insurance policy understand that both of these are more expensive and contemplate, “If I’m paying much more, why don’t I simply get the policy that will last my whole lifetime? Whole Life looks like the better choice!”
But a return of premium policy might be a better purchase for somebody wanting to get additional value for the price. Here is why:
Return of premium and whole life policies aren’t just different for the benefit of being different. They both have benefits – or at least perceived benefits – and negative aspects in comparison to conventional term life insurance.
The most significant benefit to buying a return of premium life insurance policy is stated in the product name: you receive all the premiums back at the end of the term.
Many people are convinced that life insurance is a misuse of money if it will never pay out, that they have put significant money into something and didn’t deliver something tangible in return. This is the wrong way to think about it for three simple reasons.
A return of premium insurance policy can allow an insured person to feel much better about their investment by providing a monetary return if you outlive the insurance policy – a win-win. It’s money you’ve actually paid and not “brand-new” money, but it can be an attractive boon in your retirement to get a major sum of money returned (like an extreme version of finding five dollars in a jacket pocket).
Whole life, on the other hand, will last for as long as you pay your premiums. That can offer a feeling of ease that you will always be protected, and your beneficiaries will receive something, no matter how long you might live. The cash value component of whole life also functions as a mandatory savings vehicle. Over time the insurance company reduces its commitment to cover your death benefit as your cash value increases and subsequently becomes large enough to cover the whole death benefit payout.
Of course, as with almost everything, there’s an additional side of the coin, and there are a few drawbacks to both of these insurance policies that term insurance doesn’t have.
In a return of premium insurance policy, you pay a little bit extra each month and then receive the money back at the end of the policy period – normally 20 or 30 years later. But consider what you could have accomplished with that money in that period of time.
We are going to get into some numbers in a bit, but let’s say you are paying $70 more each month than a conventional term life policy for the advantage of getting that money paid back to you. At the end of a 20-year term, that’s an additional $16,800. If you invested that money in a retirement plan or mutual funds, you could have multiple times that, dwarfing the total you “saved” by getting the premiums paid back.
Whole life has comparable disadvantages. The cash value component typically doesn’t produce as high a return as other investment instruments, you have to pay for an insurance policy later in life when you most likely don’t need to have it, and you could be accomplishing a lot with the additional money you’re paying out on the policy. That’s why many financial consultants have a strategy of “buy term and invest the rest.”
In the end, if you’re going to invest some extra money in your life insurance, a return of premium insurance policy offers a better value than a whole life. You get an extra benefit, and it’s a great deal cheaper.
A very healthy 30-year-old male considering a 20-year, $500,000 return of premium insurance policy can buy it from AIG starting at about $91 a month. A female in very good health can buy it for about $75 a month. Similar policies for a man and woman from Prudential Insurance Company would cost about $101 and $88 a month, respectively.
Compare and contrast that to a whole life policy from State Farm. A $500,000 policy for a very healthy 30-year-old male is about $459 a month, and $409 for a female.
Both insurance policies cost more than a conventional term life insurance policy, yet the price difference is huge. A complete year of a return of premium policy will cost you the same as paying for just a few months of a whole life insurance policy.
Additionally, you will get that cash back in the end. Whole life has a financial investment option but, once again, you might not see huge returns from it. Using a return of premium policy, you can continue to practice “buy term and invest the rest,” investing the $300+ you are not investing in a whole life policy each month and having the premiums returned.
At the end of the day, a budget-friendly conventional term life policy will be adequate for most people’s needs. But if you intend to get some additional value out of your insurance policy and then have to decide between a return of premium and whole life insurance, a return of premium policy is the obvious winner for most folks.