Are Return of Premium Polices the Premium Choice?
Posted by David Schneider | December 31, 2007

Return of premium insurance policies have gotten a lot of attention because they guarantee that the insured will get the total amount spent on the insurance policy’s premium payment if he or she stays alive for the full term of the policy. On the surface, return of premium policies seem like a no-brainer. Instead of wasting your money on term life insurance policies that won’t give you any return on your premiums if you outlive the policy, you are certain to get the full amount of your payments back. By taking a closer look at return of premium policies, though, you can take a more critical look at these insurance policies to see if they are the premium choice for you.

Paying for Return of Premium Policies

Return of premium insurance policies give you a guarantee on the premiums that you invest, but there is a cost for this. When you decide to take a return of premium insurance policy, one of the first things that you should notice is how much higher the payments are than those for regular term life insurance. These higher payments don’t bother many people because they are fairly certain that they will get all of the money back. They think that instead of spending less money that they will never see again, they will spend more money that will be returned to them in the future.

The Danger of Making High Payments for Many Years

This is sound thinking if you have enough money to pay for the return of premium policy for the duration of the policy, but the future is always uncertain. You might be able to afford the higher payments now, but it is almost impossible to determine what your financial situation will be like in 15, 20, 25 or 30 years with any accuracy. Things happen that are completely out of a person’s control. You could lose a job or suffer medical problems that would make it impossible for you to make the high payments. The problem is that many policies will only give you a return of premium if you pay for the entire policy. Some return of premium policies are only 15 years long, but you do not get returns that are as good as those on longer policies. Since most people get the policies because they expect to be alive in 30 years, they decide to take the longer-term policies that pay off better.

Returns on Death Benefits

Making high premium payments with the expectation to get the money back makes sense, but you should also consider what kind of benefits your family will get if you do not outlive the policy. Unfortunately, if you don’t outlive the policy, your family might not get more from a return of premium policy than they would a term life insurance policy with lower payments. This means that you could throw away hundreds of dollars a year. When you take out a return of premium insurance policy, you are betting that you’ll outlive the policy, which is usually between 15 and 30 years. If you don’t outlive the policy, though, the extra money that you spent on the return of premium policy would have been better spent through other investments.

Protection from Taxes

Despite the possible negatives of a return of premium insurance policy, many people still decide that they are the best choice. Not only are they betting that they will outlive the policy and be able to get all of their money back, the money that they get back when they outlive the policy is protected from taxes. If you invest $1,000 a year on a 30-year policy, you will be saving taxes on $360,000. The amount that you save will depend on how much money you make and where you live, but regardless of these variables, the savings can be significant.

Knowing the pros and cons of return of premium insurance policies can help you understand if they are a good bet for you. The bottom line is that if you can afford to make the payments throughout the duration of the policy and you outlive the policy, then return of premium insurance policies can be a good choice for you. If this seems a little too risky for you or you don’t think that you can afford the high payments, then a regular term life insurance policy is probably best for you.