Most term life insurance policies expire without the owner receiving a payout. While it’d be undoubtedly good news that you’re still alive, you may feel that your money has been wasted. A “return of premium rider” provides a financial payout at the end of your policy term as long as you’ve made every payment. While this guarantee sounds appealing, it may not be the right choice for everyone. If you have questions about your insurance needs, consider speaking with a financial advisor.
How Does a Return of Premium Rider Work?
A return of premium rider is an add-on to a term life insurance policy. This rider guarantees a refund of all of your life insurance premiums paid, as long as you make every payment before the policy expires. However, like most insurance riders, the return of premium benefit comes with an added cost. This cost varies based on which life insurance company is issuing the policy and how much coverage you buy.
A policy with a return of premium rider works just like a traditional term policy. You pay life insurance premiums monthly or annually to protect yourself in case you die during the term of the policy. When a policyholder passes away during the coverage period, their beneficiaries receive the policy’s death benefit. Coverage periods vary depending upon the specifics of the contract. The most common terms for a term life insurance policy are 15, 20 or 30 years.
A major difference arises between a traditional term life insurance policy and one with a return of premium rider when the policyholder is still alive at the end of the term. Should this happen when the policy matures, they will receive all of their premiums paid back in a lump sum. Because this lump sum is a return of premiums paid and not treated as income, you do not owe any taxes on it.
Benefits of a Return of Premium Rider
If you purchase a return of premium rider for your insurance policy, you’ll receive specific benefits. Here’s an overview of them:
- Receive life insurance protection during the policy term: Just like a traditional term life insurance policy, your beneficiaries will receive a death benefit if you pass away during the coverage period.
- Return of all premiums paid if you outlive the policy term: If you do not pass away during the policy term, you’ll receive a refund of all of the premiums you paid.
- No income taxes are due on the return of premium benefit: Because you’re receiving a refund of your payments, the payment is not considered income. Therefore, you won’t incur any additional income taxes on it.
These benefits are only available if you make every payment during your policy’s term. If you miss even one payment, it may nullify the entire return of premium benefit. Speak with your life insurance agent to ask about their policies on missed or late payments.
Possible Reasons to Avoid a Return of Premium Rider
While the return of your premiums sounds like a win-win proposition, it may not be the best fit for you. Here are some of the reasons against return of premium riders on term life insurance policies:
- Return of premium riders cost extra: If you want this benefit added to your life insurance policy, you’ll need to pay extra fees. So in short, return of premium life insurance policies cost more than a traditional term life policy.
- You don’t earn interest on the money: While you may get your money back, it doesn’t have the same buying power as before. The money does not earn interest and its buying power will erode through inflation.
- Must hold the policy for the entire term: To receive a refund of your premiums, you must make every payment and hold the policy for the entire term. Many people cancel or replace policies before they expire, which means they wouldn’t qualify for the refund.
A return of premium rider can be worth it for policyholders who actually keep their policy for the entire term. However, many life insurance policies don’t reach the full term. That’s because needs change as families have children, and maybe you miss payments due to financial struggles.
When the policy is not held for the full term, it results in the insured paying a higher cost for a return of premium rider benefit that never materializes. The best option is to speak with a licensed insurance agent or financial advisor who can explain the pros and cons of available life insurance options.
Tips for Buying Life Insurance
- Talking with a financial advisor about your life insurance options can help you determine which policy is right for you. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Figuring out how much life insurance you need can be a challenge. Our life insurance calculator helps you add up your needs to get a policy that covers your loved ones.
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