How Return-of-Premium Life Insurance Works

When you consider life insurance options, one type of policy that may seem like a good idea at first is something known as return-of-premium life insurance. If you don't die during the policy's term, return-of-premium life insurance refunds the premiums you paid for your policy. Score! Free life insurance, right? Actually, there’s a little more you should know.

What is a return-of-premium life insurance policy?

Return-of-premium is a type of life insurance that will cover you for a set number of years such as 20 or 30 years. If you don’t die during the term, your coverage ends and you get your money back. This type of life insurance is sometimes a standalone policy, or it may be an additional cost and benefit that you can add to a term policy.

How a return-of-premium life insurance policy works

The process of getting a return-of-premium life insurance policy is the same as it is for obtaining term life insurance. You choose the coverage amount and the term. The insurance company may require a medical exam or a questionnaire with your medical history.

If you die during the term of your return-of-premium policy, it will pay the death benefit to your beneficiaries, as with all term life insurance. If you don’t die during the term of your return-of-premium policy, there will be no death benefit, but as long as you kept your premiums up-to-date, you will receive an amount equal to the premiums you paid.

Pros & cons of return-of-premium life insurance policy

The main consideration when evaluating return-of-premium life insurance is whether or not you'll get your premiums back: you're betting that you'll outlive the term of the policy and that your premiums will be returned.

Advantage of return-of-premium life insurance policies

You get money back if you don’t die during the policy’s term.

It’s essentially free. If you don’t die, you get all your money back. And that means you’ll get a big lump sum later in life, perhaps when you’re approaching retirement.

Drawback of return-of-premium life insurance policies

Premiums are considerably more expensive than similar term life insurance policies.

That’s the catch you were waiting for. While you may eventually get all your money back, you’re spending extra money each month for something that doesn't offer the opportunity for future gains. In fact, over 20 or 30 years, the additional amount you have paid could be worth less due to inflation.

Comparing return-of-premium life insurance vs. permanent life insurance

If you’re considering return-of-premium life insurance, another option you may want to look into is permanent life insurance.

Compared with return-of-premium life insurance, permanent life insurance, such as whole life insurance or universal life insurance, offers more benefits. First, permanent life insurance covers your entire lifetime: as long as required premiums are paid, it will pay a death benefit someday.

In addition, permanent life insurance policies build cash value that can eventually be worth more than you pay for your policy. You can access the cash value at any time, for any reason (although doing so will reduce your death benefit).

Is return-of-premium life insurance worth it?

On its face, return-of-premium insurance may seem like a good idea. But given the additional cost, it may not provide as much additional value as you think.

Permanent insurance (or a combination of some permanent and some term life insurance) may be a better value and more flexibility. You’ll build a cash value that grows over time and can be used for any purpose. A financial advisor can help show you more about how different types of life insurance work and how life insurance can give you more flexibility in your overall financial plan.