What is return of premium life insurance? And why should I have it?

Life insurance. It’s something that we all know that we need, but figuring out what type of insurance policy to get can be confusing and costly. You may have never heard of return of premium life insurance, so I’m going to break it all down for you and tell you exactly why you need to add one of these to your portfolio.

A return of premium life insurance policy is different than regular term life insurance or whole life insurance. But while it is different, it is also similar because it is a sort of combination of the two.

What is term life insurance?

A standard term life insurance policy gives you coverage for a specific period of time (for example: a 20 or 30 year term) and when that time is up, if your family has not had to use the death benefit, the money that you have paid in is a sunk cost—so, cash no value has accumulated, and there is no more insurance coverage either.

What is whole life insurance?

A whole life insurance policy does build cash value, but typically has higher monthly premiums because it is set up to be an active policy until you pass away, so there is no definite term.  Or it gives you the option to cash it out later in life because the premiums that have been paid essentially build a forced savings account for the insured.

What is return of premium life insurance?

With a return of premium life insurance policy, you have life insurance coverage for a specified period of time (a term of 20 or 30 years, for instance), but if you live beyond the term and did not need the death benefit amount, then you are able to get the value of the premiums that you have paid in over that term returned to you. So at the end of the term, you now have several thousand dollars set aside in a savings! So basically, you have built a nice savings account for retirement.

This option is especially appealing for younger adults who may be just starting a career or a family and don’t have a lot of disposable income with which to buy a whole life policy, but don’t want to feel like they are throwing money away on a term policy, assuming they will outlive the benefit.

It is also a nice way to ensure that you and your family have a retirement nest egg too. While enjoying the benefit of the life insurance coverage, which is important when you have small children or large expenses, such as a mortgage or college to pay for, it provides that safety net for your family with financial security at the time that it is most needed. But assuming you won’t need to use it for the insurance, it is also a very nice retirement savings tool.

Summary of benefits of return of premium life insurance:

• Lower premiums—the main goal of this type of insurance is to provide term coverage, so the premiums are lower than whole life, as the focus is not on building the cash value.
• Fixed premium—because the focus is more on term coverage, the premium is fixed, so for the term of the policy, the premium will not change.
• Provides term coverage—if something were to happen to the insured during the term of coverage, the entire death benefit would be paid to the beneficiaries.
• Builds cash value—even though the focus of this insurance is not to build savings, if you do not need the death benefit during the term of the insurance, you will get the premiums that you paid in over the years returned to you.