What is a Return of Premium Life Insurance Policy and is It Worth Buying?
When you’re looking for a life insurance policy, it’s important to look past the gimmicks, ads, and sales pitches. For most policies, such as “return of premium” policies, it’s better to look at your budget and your needs before purchasing. And, at the risk of sounding like a broken record, it is always important to speak to an independent agent.
For seniors, especially, shopping for life insurance needs to be carefully researched. Policies that offer return of premium are attractive options for seniors looking for life insurance coverage. In this article, we’ll cover the details of these policies and why they may – or may not – be right for your situation.
What Is A Return of Premium Life Insurance?
With a normal life insurance policy, you pay a set amount (a premium) in exchange for your benefit.
A return of premium life insurance policy is just that: a policy in which your premium is returned to you. This is most often included via an insurance rider.
For example, if you buy a 30 year term life insurance policy and you, the insured party, survive the policy’s term, the premiums are returned to you, occasionally with interest. These premiums are not taxable. Or this type of policy can include a portion of the premiums paid to the beneficiary upon your death.
For seniors, especially, this is an attractive idea, because you see the money you’ve invested come back over a set period of time. These premiums can be used to invest in retirement or other financial needs or, if your premiums are returned to your beneficiary, it can mean a larger payout.
As attractive as this may seem, let’s dive a little deeper into why this type of policy might not be right for seniors.
You Get What You Pay For…
….and with Return of Premium Insurance, you may be paying a hefty price tag. For seniors, especially, being budget conscientious is something to consider when shopping for life insurance. Often, by the time you reach retirement age, there is little-to-no income coming in and you are instead relying on your savings. This is why return of premium riders might not be a good idea for seniors shopping for life insurance.
With this type of insurance, the money-back feature will end up costing you a lot more than a tradition. Trusted Choice, an association of independent agents, reported that a return-of-premium life insurance policy could cost up to to three times more than a regular term life policy – for the same amount of coverage. Trust Choice suggests that anyone shopping for a life insurance policy consider buying a lower-cost regular term life policy and investing the difference in premiums.
Another thing to consider with this type of insurance is if you’re able to maintain the premiums. As a senior, you’re getting into retirement. WHile you may be able to pay the premiums now, will you be able to sustain the premiums in the future? Especially if something happens and you find yourself unable to pay your premiums.
In order to see any type of return with this type of policy, you need to maintain your premiums in order to get a return on the premiums you’ve paid – often throughout the entire policy. If you are forced to cancel your policy before the end of the term, you may not see a return on what you have paid.
Additionally you may be locked into a minimum amount of coverage you need to purchase to activate this rider and gain a return of your premiums. Buying too much life insurance is never something we recommend, and the minimum policy size may be too large for your needs – which means the premium size will also be too large. Under normal term life insurance circumstances, you have options to reduce your life insurance coverage amount – and premiums – as needed. With this type of rider, should you need to reduce your life insurance benefit due to changing needs, you may lose the return of premium benefit.
You may also want to consider reading the fine-print of the return-of-premium insurance rider. Some insurers will add other details to the policy. For example, certain policies will build cash value within the policy, allowing your premiums to go toward a cash account. With this stipulation, you will be able to take loans against the cash value.
You may also still be able to convert from term to a whole life insurance policy with a return of premium rider. We almost never recommend that seniors enter into whole life insurance policies for much the same reason we don’t recommend a return of premium rider: the premiums are often too expensive to justify the death benefit. Additionally, if you decide to take cash out and are unable to pay back the loan, either your premium return or your death benefit may be reduced.
As a senior, you want to make sure your family and assets are protected – without breaking the bank. This is why it is incredibly important to consider which life insurance riders you are choosing for your policy.
Return of premium riders offer great benefits for those who are younger and in relatively good financial and physical health; however, they may not be the right choice for seniors on a budget, or for those with health problems.
Think of it this way: all life insurance offers a return of premium. Your return is your death benefit and the knowledge that your family is protected, should something happen to you. That is why you pay a premium for life insurance coverage.
If you are a senior, life insurance does not have to be expensive. Finding affordable coverage is simply a matter of talking to the right agent and accurately assessing your financial needs. Give us a call today to find out more information about return of premium life insurance for seniors, and to see what kind of life insurance policy is right for you and your family.