Return of Premium for Term Life Insurance is not yet a very popular Term Life Insurance rider. According to research by LIMRA ( Life Insurance Marketing and Research Association ), only 2% of Term Life policyholders have added Return of Premium rider in their policy.
What does the Return of Premium rider offer? Term Life Insurance, as we know, provides insurance coverage to the policyholder within a specified term of the policy. If the policyholder dies during the term of the insurance, the beneficiaries will receive the death benefit. However, when the policyholder outlives the term of the insurance, he will not get anything from the insurance company.
By adding the Return of Premium rider to your Term Life Insurance, you get to have a death insurance coverage for the duration of the term at an affordable rate. Also, you will get a full refund of the premiums paid when you outlive your insurance policy.
This seems like a sound offer to Term Life Insurance clients, but not everyone gets this rider together with their Term Life Insurance. Most financial planners would advise in investing the additional cost to another investment product. By doing so, they would have more returns from their money compared to paying the additional cost of the return of premium rider where you will only get the amount paid without any interest.
This could be true for those who are inclined to investing their money for it to grow. However, there are also those individuals who do not want to risk putting their money in investment products but are just concerned about putting aside some money for the future.
How Does the Return of Premium for Term Insurance Work?
Term Life Insurance is more affordable compared to Whole Life Insurance. However, it does not have a cash value. To make Term Life Insurance more attractive to clients, Insurance Companies offer to refund all premium payments when the policyholders outlive the term of the policy. This means the collection of an additional cost to the policyholder that the Insurance Company can then invest in other products to grow the money.
Below is an illustration of how Return of Premium works:
John Doe, 25 years old, non-smoker, decided to purchase a $250,000 Term Life Insurance, 20-year term. His monthly premium is $20 per month. Given this situation, if he dies within the term of the policy, his beneficiaries are guaranteed a death benefit of $250,000. However, if he outlives the term of his policy, he gets nothing or has the option to renew the policy at a recalculated rate.
If the client adds a Return of Premium rider, his monthly premium will increase to $75 per month. If he dies during the term of the policy, his surviving beneficiaries will get the death benefit of $250,000. But, if he outlives his policy, he will get a full refund of his premium payments which amounts to $18,000, tax-free. This is like setting aside some money on a monthly basis that you can use to pay-off a mortgage, use the money for some vacation getaway with the family or even reinvest the whole amount to a retirement plan.
Advantages of Adding Return of Premium Rider to Term Life Insurance
Not everyone is good at saving money. Setting aside a portion of their income for retirement can be a challenge. And not all are willing to risk their hard-earned money in investing in stocks or options. There is this chunk in the population that would rather overpay their tax during the year and claim for a refund the following year. This is how they save. People have different risk tolerance and money management style.
Adding a Return of Premium rider to a Term Insurance is another way to save money. You set aside a portion of your monthly income for insurance coverage and savings portion. This is an advantage to those who were able to purchase a Term Life Insurance at a young age and the probability to outlive the term of the policy is high.
And because Term Life Insurance is the most affordable insurance in the market, you enjoy the benefit of Life Insurance and Cash Value at the end of the term at the least price compared to Whole Life Insurance. If the policyholder dies within the term of the insurance, the surviving family is guaranteed the death benefit as stipulated in the policy. If he outlives the term, he gets the full refund of the premium payments made – free of tax.
Adding the Return of Premium rider also allows the policyholder to receive a pro-rated amount of the premium payments in the event that he needs to cancel his policy. The lump-sum amount that the policyholder will receive can be used for his immediate needs or he can invest such amount to any high return investment products.
Reasons Not to Avail of the Return of Premium Rider
Not everyone buys the idea of adding a Return of Premium rider to their Term Life Insurance. Is it worth to pay additional premiums to get a full refund of the premium payments? Many consider doing a financial analysis first if it is beneficial to pay extra money for this rider. Below are some of the things to consider in making a decision whether to add a Return of Premium Rider to your Term Life Insurance:
- Investing in Other Products with Higher Returns – There are many other investment products that yield a higher return compared to the Return of Premium that you will get with no eaned interest at all. Some of these are investing in ROTH IRA and investment in stocks and mutual funds.
- The Intent of Buying the Insurance – Term Life Insurance is so affordable that many people would but it for a certain purpose. Most of it is so the Death Benefit can cover mortgage payments or college tuition for their children in the future in case the policyholder dies within the term. As such, if the intent is to pay the future obligations, it is not practical to add Return on Premium rider to the policy.
- Chance to Outlive the Term is Low – Return of Premium is beneficial to those who purchase Term Life Insurance at a young age and are in good health. Otherwise, if the policyholder expects that he will not outlive the term of the policy, adding this rider to the policy is unnecessary.
Adding the Return of Premium for Term Life Insurance is dependent on the situation of the policyholder and his ability to handle risk. There will be policyholders who would just want to pay the minimum premium payments for Term Life Insurance and get death benefit coverage to a specified term and invest their money in other products.
There are also those who are conservative with their hard-earned money and would be willing to pay more premiums to get their money back in the future. Whether you are a risk-taker or not, talking to a Professional Insurance agent will help you get the kind of insurance that would best suit your needs.
To find out more about Term Life Insurance and to get a free and confidential quote, call the professionals at BBIFinancial at (800) 958-1525 during normal business hours or contact us through our website www.BBIFinancial.net for more information.
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