Life insurance can be confusing, and it may be hard to decide between what you need and want in a policy. However, one sure thing about life insurance is that it is important if you want to ensure that your family is protected and has financial security in the event of your death.
An insurance plan that gives you your cash back if you outlive the policy may seem like the most attractive option. But is return-of-premium life insurance really the best choice for you and your family?
Your quest to find the best insurance policy might have led you through several types of life insurance. So, what type of life insurance will best serve your needs? Before answering this question, it is important to understand the different types of life insurance and how they work.
Types of Life Insurances
Before diving into how return-of-premium insurance works, let’s review the different types of life insurance:
- Term life insurance: There is no cash value for this type of insurance. It will typically only cover you for a period of 10-30 years, after which you have to decide whether to renew the policy or get a different one.
- Whole life insurance: This is a form of permanent life insurance that lasts a lifetime. Unlike term life insurance, a whole life insurance policy has a cash value.
- Group life insurance: You buy this type of life insurance as a group, often through your workplace. Employers often provide this type of insurance as an employee benefit. Group life insurance offers term life insurance coverage. Employees will typically pay little to nothing for the insurance, but it likely won’t provide as much coverage as an individual life insurance policy.
- Service-Disabled Veterans life insurance: The S-DVI insurance premiums have lower-cost coverage and are only eligible for veterans.
What Is Return-of-Premium Life Insurance?
As the name suggests, return-of-premium life insurance promises to refund the policyholder if they outlive the policy. It certainly sounds like a tempting option. But before committing to this type of policy, you should learn how it works, review some pros and cons, and ultimately consider whether it is worth it.
How Does Return-of-Premium Life Insurance Work?
Return-of Premium life insurance is a kind of term life insurance policy also known as ROP term life insurance. It refunds the full amount paid during a policy term to the policyholder if they outlive the policy. If the policyholder happens to die during the term of coverage, the beneficiaries will still be paid in full.
What Is the Catch with Return-of-Premium Life Insurance?
Return-of-premium life insurance seems like a great deal. So what’s the catch?
The money-back feature comes with a price — you will have to pay more for this policy than for standard term life insurance. The average 20-year term life insurance policy costs up to $147 a month, while the return-of-premiums life insurance costs up to 30% more.
Return-of Premium Life Insurance Features
The features of a return-of-premium life insurance policy vary by the insurance provider. It is essential to consult your financial advisor on a specific policy’s cost details and benefits to determine whether it meets your needs and is within your budget.
Some insurance companies offer cash value over time. This feature allows the policyholder to take a loan against the cash value. However, if the policyholder cannot service the loan, the insurer will pay off the loan and then deduct the funds from the refund amount after the policy expiration. Other insurers don’t offer cash value, and you will only get money back after your death or the end of the policy.
Return-of-Premium Life Insurance Pros and Cons
- You are guaranteed to get money back from your policy even if you outlive the term.
- The money you get back is not taxed because it is not money earned but simply a return of the money you paid to the insurer.
- The money doesn’t earn interest, so paying into a return-of-premium policy is not an investment option.
- This policy is expensive. You will pay more in premiums for the insurance than you would for a regular life insurance policy.
- You may lose your money if you stop paying your insurance premiums or cancel the policy.
- You may not be able to afford the life insurance that covers your needs. For instance, depending on your age and health, you may require life insurance coverage for 20 years. It may be difficult or impossible for you to afford return-of-premium life insurance for your desired term due to the higher expense of the policy. You may have to reduce your coverage to 10 or 15 years, which may not meet your needs.
Factors to Consider When Choosing a Life Insurance Policy
1) Family Dynamics
The first factor to consider when comparing life insurance policies is your family dynamic and relationships. The number of dependents you have and how much financial support they will require should influence how much insurance you purchase.
2) Age and Health
It is also essential to consider your health and age. Return-of-premium life insurance offers policies for 10, 15, or even 30 years. By calculating your yearly payments, you will be able to decide what works best for you.
3) Work or Business
As mentioned earlier, return-of-premium life insurance is expensive and doesn’t earn interest. Suppose you are running a company that will benefit your family in the long run. In that case, it might be wise to invest the extra money into your business and opt for a less expensive policy.
Is Return-of-Premium Life Insurance Worth It?
Now that you understand what return-of-premium life insurance is, its main features, some pros and cons, and the factors to consider when choosing a life insurance plan, you should ask yourself whether it is a worthwhile investment for you. Although the return of money might seem like a great deal, the cons may outweigh the pros in your case.
Before choosing a life insurance policy, it is wise to consult with a certified financial adviser who can review your specific circumstance and compare several options.
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