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How Return-of-Premium Life Insurance Works

Insurance, Life Insurance
How Return-of-Premium Life Insurance Works

An insurance policy generally isn’t something you can return for your money back, unlike a regrettable jacket or, these days, even a car.

Take your auto insurance policy, for example. Let’s say you never have an accident, make a claim, or even call your insurer with a question over the course of a year. Insurance company honchos would never entertain the thought of a refund because, in their minds, you were paying for protection, even if you never used it.

But among the types of life insurance, one breaks out of that conventional wisdom: Return-of-premium life insurance promises to refund the money you paid if you don’t die during the policy term. It’s a compelling proposition for people who cringe at the thought of paying for insurance with the possibility of never getting a payout.

How it works

You buy a return-of-premium term life insurance policy, perhaps for a 20- or 30-year term. If you die during that time, your beneficiaries receive the death benefit. If you outlive the policy, you get back exactly what you paid in (with no interest). The money back is not taxable.

With a regular term life insurance policy, if you are still living when the policy expires, you get nothing back.

But everything has a price, right? You’ll pay a lot more for the money-back feature. According to Trusted Choice, an association of independent agents, a return-of-premium life insurance policy could cost anywhere from 30% to three times more than a regular term life policy for the same coverage. The association suggests you consider how much you could potentially gain by buying a lower-cost regular term life policy and investing the difference.

Pros Cons
  • If you outlive your policy term, you get your money back, unlike with regular term life insurance.
  • It’s much more expensive than regular term life insurance.
  • You don’t earn interest on your money.
  • You generally have to hold the policy for the entire term to get your money back.

Others things to keep in mind about return-of-premium life insurance:

  • The feature often is added as a rider to a term life policy.
  • If you cancel your policy before the end of the term — or simply stop paying — you might not get any money back, depending on the policy.
  • There may be a minimum amount of coverage you must buy, such as $100,000.
  • Some of the biggest life insurance companies don’t sell return-of-premium policies.

Other considerations

Some insurers put twists on return-of-premium life insurance, so be sure you understand all the details of the policy. Return-of-premium policies from State Farm Life, for example, build “cash value” within the policy. This means that a portion of your premiums will go toward a cash account. You can take loans or withdrawals against the cash value. However, if you don’t repay the loan, your death benefit (if you die) or money back (if you don’t die) will be reduced by the amount taken out.

As with regular policies, you can convert term to whole life insurance with return-of-premium policies. This is a convenient (but probably expensive) way to keep your coverage if you decide later that you’d prefer a permanent policy.

Return-of-premium life insurance represents about 2% of term life sales based on annualized premium, according to LIMRA, an industry research group. At the height of its popularity in 2009, this type of policy garnered about 5% of sales.

Amy Danise is an editor at NerdWallet, a personal finance website. Email: adanise@nerdwallet.com. Twitter: @AmyDanise.


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