What Is "Return of Premium" in Term Life Insurance?
If you've been hunting for a life insurance policy, then you have probably found quite a selection from which to choose. The highest cost policies are whole life, variable life and universal life because of the savings aspect of these policy types. Term insurance is the most inexpensive, and there are many kinds on the market, including "return of premium" term insurance.
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Types
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Life insurance provides protection for the policyholder's survivors. If you have bills, family goals or simply want money available for funeral expenses, a life insurance policy will serve these needs. Some insurance policies also provide a tax-deferred method of saving through cash value. These types of policies include whole life, variable/variable universal or universal life insurance. Variable universal allows the owner to dictate the investment of the cash value in a variety of mutual funds. Universal life applies growth with the interest rate at the time. Whole life offers guarantees. Term insurance normally provides no savings aspect and is pure coverage.
Features
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Whole life covers you for your entire life, just as the name implies. Term insurance is for a specific period or term. The most inexpensive form of this insurance is annual premium term that increases in cost each year. Other policies, such as level premium term, remain constant throughout the life of the policy. These policies cost more in the early years and less in the later years of coverage. You can often add a return of premium rider to these types of policies.
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Benefits
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Return of premium term insurance gives the purchaser the opportunity to receive all the premiums he paid into the policy over the years. There is a cost for this option, which often increases the premium for the policy as much as 40 percent. However, it is still less expensive than whole life.
Considerations
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Do the math before you buy. See if you can make more money by investing the additional amount instead. Consider taxation on the growth of your side fund when you do. The IRS doesn't consider a return of premium taxable, so you will not pay any taxes on the policy refund. Sometimes, if your budget allows, it makes sense to add the rider.
Warning
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Read the fine print. Many of these policies only return a small portion of the premium if you don't hold the contract to maturity. Insurance premiums lower as people continue to live longer; insurance needs change and so do budgets. Weigh all the potential pitfalls before you make a purchase.
Other Options
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If you like the concept of saving money with insurance, consider a universal life or a variable universal policy. While these policies often cost more, you can adjust your payment to your income, use riders to supply additional insurance and keep the cost lower. While you'll make less money than buying term and investing the rest in the early years, normally the policy has a higher return over a period of 15 to 30 years than a return of premium policy.
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References
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