What Does Return of Premium Life Insurance Mean?

The frustrating thing about term life insurance is that if you outlive it, you lose all of those premiums you paid for. Enter return of premium life insurance.

Written by Erin Gobler / June 28, 2022

Quick Bites

  • You may not enjoy the idea of paying for term life insurance and then outliving it and never seeing a dime of that money back.
  • Premium life insurance offers a policy that guarantees your premiums back if you do, in fact, outlive your life insurance.
  • It sounds like a good deal, but it’s not cheap, and your money may work harder for you if invested elsewhere.

So, what happens if you spend 30 years paying for life insurance only to outlive it? That’s a lot of money down the drain (though for good reason). There’s an alternative to simply losing it all: Return of premium life insurance.[1]

“Unlike misfitting clothes or a defective car, you normally don't get a refund for the premiums made on an insurance policy,” says Liam Hunt, a retirement expert at Gold IRA Guide, a website about gold and precious metals IRA investing. However, with yet another insurance policy, you can! Of course, you’ll lose out on that one if you do die during the term of your policy. Is it worth essentially insuring your insurance? Let’s dive a bit deeper, shall we?

Inside this article

  1. How does it work?
  2. How much is it?
  3. Example
  4. Who should get it?
  5. Pros and cons
  6. Is it worthwhile?
  7. FAQs

How does return of premium life insurance work?

Okay, so you decided to buy life insurance. You choose a term policy, the kind that usually last 10 to 30 years.

So with your initial life insurance policy, you pay a monthly or yearly premium and if you die during that term, your beneficiaries get a death benefit, aka, money so they can survive without your income. However, if you don’t die during the term, all that money you paid out is gone.

Enter return of premium insurance, which you can buy as part of your policy or add as a rider. Return of premium insurance, should you outlive your policy, will give you back 100% of your premiums. Seems like a pretty sweet deal: You’ll have been covered for the term AND get your premiums back. [1]

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How much is return of premium life insurance?

And here’s the rub: return of premium life insurance will cost you a pretty penny.

These policies often have premiums that are several times higher than a standard term life policy.

Take State Farm, for example. The company has 20-year term life policies with $250,000 of coverage that start at $175 per year for a healthy 25-year-old female in Illinois.[2] That same person would pay a rate of at least $570 per year for a return of premium policy for the same 20 years and a $250,000 death benefit.[3] That’s an increase of 225%. Ouch.

Of course, if you end up living longer than the policy term, you’ll get your full premium back. However, if you die within the policy term, you’ll have paid considerably more for a benefit you could have gotten for a lot cheaper. If only we could tell the future.

Return of premium life insurance example

To give you a greater understanding of how return of premium life insurance works, let’s discuss a short example.

Suppose you sign up for a 20-year return of premium life insurance policy with a death benefit of $250,000 and an annual premium of $600 per year.

Each year, you’ll pay $600 per year—or $50 per month—for your life insurance coverage. If you die within that 20-year term, your loved ones that are listed as your beneficiaries will receive your $250,000 death benefit. But if 20 years pass and you’ve outlived your policy, you’ll receive the full $12,000 back in returned premiums. Oh, and those returned premiums? Not taxed!

Are Life Insurance Premiums Tax-Deductible?

Are Life Insurance Premiums Tax-Deductible?

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Who should get return of premium life insurance?

Return of premium life insurance isn’t right for everyone, but there are some people who may find it to be a good option.

First, as we mentioned, one of the biggest complaints people have with term life insurance is you spend decades paying premiums on a product that simply disappears when the policy term ends. This is an option to get that money back.

Return of premium life insurance could also be a good option for someone who is struggling to save for the future. Look at it this way: you pay your monthly bills—including your insurance premiums—each month because you have to. But because there’s no one forcing you to save money, you might simply not do it. In this case, a return of premium policy could be a sort of forced savings mechanism that will benefit you during your later years when you get the money back.

Pros and cons of return of premium life insurance

ProsCons
Get your premiums back at the end of your policy More expensive than regular term life insurance
Returned premiums aren’t taxed Only get your premiums back if you hold the policy for the entire term
Cheaper than permanent life insurance Miss out on investment returns elsewhere
Forced savings vehicle

Pros of return of premium life insurance

The clear advantage of return of premium life insurance policies is that if you outlive your policy, you’ll get all of your premiums back. There’s essentially no other insurance policy that offers this benefit. On top of that, because the policy is simply returning money you’ve paid in, you also won’t be taxed on those return premiums, even though they’ll feel like income when your policy term ends.

Another benefit of return of premium life insurance is that, while it’s more expensive than a standard term life policy, it’s cheaper than permanent life insurance.[4] And while permanent life insurance isn’t appropriate for many people, some do find themselves going in that direction simply because they hate the idea of wasting their money on a temporary term policy.

Finally, as we mentioned, return of premium life insurance can serve as a forced savings vehicle, which could be beneficial for someone otherwise struggling to save for the future.

Is Life Insurance Worth It?

Is Life Insurance Worth It?

Learn how life insurance works, how much it costs and whether you should get it.

Find out more

Cons of return of premium life insurance

For all of its benefits, return of premium life insurance also has some serious disadvantages, starting with its cost. As we discussed previously, a return of premium life insurance policy can cost several times the average premium of a standard term life policy.

“For many, it's simply not worth opting for return for premium life insurance,” Hunt says. “The additional rider comes at a cost that often increases the policy holder's premium by 300% to 400% annually.”

Another downside of these policies is that to recover your premiums as promised, you’ll have to hold your policy until the end of the policy term. If you cancel your policy early or allow your policy to lapse, you will likely lose out on some or all of those premiums.[5]

Finally, while return of premium life insurance can be used as a savings vehicle, it’s not a very profitable one. In fact, when you account for inflation, the premiums you’ll receive back at the end of your policy term will be worth less than they were when you initially paid them. On the other hand, those same dollars could be worth considerably more if you had invested them in the stock market instead of a life insurance policy.

Is return of premium life insurance worth it?

Probably not, but as with most things, it depends on your circumstances.

For some people, it may be the right choice. It’s especially worth considering if you don’t feel comfortable signing up for life insurance without the assurance of getting those premiums back.

That being said, most people could find a better use for those dollars.

“Alternatively, the policyholder could invest the difference in the stock market and generate a return over time that exceeds the value of their refund,” Hunt says. “It's better to think of insurance as a service, rather than an investment that you might one day recoup or profit from.”

5 Benefits of Life Insurance

5 Benefits of Life Insurance

Life insurance can help protect your family when you die and earn you money in the meantime.

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Earlier, we pointed out that State Farm’s term life insurance policies start at $175 per year for a 25-year-old, while a return of premium policy for the same person would cost $570. Assuming you have a 20-year policy, you would receive $11,400 back at the end of your policy term in exchange for the additional $7,900—or $395 per year—you paid in premiums.

But what if you had invested those same dollars in the stock market? According to the U.S. Securities and Exchange Commission, the stock market has an average annual return of 10%.[6] At that rate, if you had invested that $395 per year, after 20 years, you would end up with more than $22,000.

When you subtract out the $3,500 you would have spent on unreturned insurance premiums, you would still have thousands of dollars more than if you had opted for the return of premium policy.

FAQs

What is the rate of return of return on premium life insurance?

Return of premium life insurance isn’t an investment vehicle, meaning there’s no return on the money you put into the policy. The amount you receive will be equal to what you paid in premiums during your policy term.

How do insurance companies make money on return of premium life insurance?

Because life insurance companies have to refund the premiums for unused return of premium policies, you might be wondering how they actually make money on them. Remember that for the decades the insurance company holds your premiums, they’re able to invest them and earn a profit. Meanwhile, you don’t see a return on those dollars.

Should I get return of premium life insurance?

Return of premium life insurance could be a good option for people who are uncomfortable signing up for a standard term life policy but generally isn’t right for most people.

Article Sources
  1. “Term with Return of Premium Life Insurance.” AAA Life Insurance Company. https://www.aaalife.com/term-life-insurance/with-return-of-premium.
  2. “Term life an affordable option.” State Farm. https://www.statefarm.com/insurance/life/term-life.
  3. “Protection and cash back — That’s a return of premium term life insurance.” State Farm. https://www.statefarm.com/insurance/life/term-life/return-of-premium.
  4. “How much does life insurance cost?” Progressive. https://www.progressive.com/answers/how-much-is-life-insurance/.
  5. “What is return of premium life insurance?” Protective.https://www.protective.com/learn/what-is-return-of-premium-life-insurance.
  6. “Saving and Investing.” U.S. Securities and Exchange Commission. https://www.sec.gov/investor/pubs/sec-guide-to-savings-and-investing.pdf.

About the Author

Erin Gobler

Erin Gobler

Erin is a personal finance expert and journalist who has been writing online for nearly a decade. Erin’s work has appeared in major financial publications, including Fox Business, Time, Credit Karma, and more.

Full bio

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