Return-of-premium policies give you a life insurance refund

Jill Overmyer

If you're shopping for life insurance but can't decide which policy is best for you, return-of-premium life insurance may be an attractive option. Return-of-premium life insurance lets policyholders get all their premium money back if their policy expires during their lifetimes.

What is return-of-premium life insurance?

Return-of-premium life insurance can be purchased as a special policy or as a rider to a traditional term life insurance policy. Just like with regular term life insurance, return-of-premium life insurance requires you to make regular premium payments. If you die during the policy's term, your survivors receive the death benefit. If you outlive the policy, regular term insurance pays you nothing. Return-of-premium life insurance, however, refunds what you've paid.

Return-of-premium life insurance is typically an expensive policy and not all insurance providers offer it. However, it is available from a number of major companies such as American General Life and State Farm Insurance. When selecting your life insurance policy ask your agent about return-of-premium options to see if this option might be right for you. Generally, if you are younger and in good health, this option may be right for you.

How does return-of-premium life insurance work?

Let's say you have a 20-year term life insurance policy that started on January 1, 2020. When your policy expires January 1, 2040 you will become eligible for a refund on all of your premium payments made over the last 20 years. Needless to say, this could amount to thousands of dollars in savings.

There are some critical facts to keep in mind though:

  1. You must make all of your premium payments. Even a single missed or delayed premium payment may void the terms of your refund.
  2. Depending on your life situation your premium payment may be up to 3 times higher than a normal term life policy premium
  3. You may be required to maintain a minimum amount of coverage (ex: $150,000) in order to be eligible for a refund.
  4. If you experience a change in life that requires you to alter the terms of your policy you may void your return-of-premium rider

Be sure that your insurance agent answers all of your questions and keeps you aware of the requirements to maintain your policy.

The benefits of return-of-premium life insurance

If it suits your situation, return-of-premium life insurance can be a great option, although the premiums are higher than those for traditional term policies. It allows you to set money aside in a way that can protect your loved ones -- and, if the death benefit never is needed, you'll get your money back.

In addition, State Farm's and American General Life's policies are both convertible. That means you can automatically convert your policy to a permanent life insurance policy (which never expires, as long as you pay premiums), even if your health has deteriorated.

The downsides of return-of-premium life insurance

According to a 2010 Psychology Today blog, return-of-premium policies combine risk aversion with a money-back guarantee. However, while this type of insurance is more secure than traditional policies, it also is more expensive. Buyers can save money or purchase more life insurance coverage with a typical term plan that does not offer premium refunds.

Prices of premiums rise steeply for older buyers and are guaranteed to be level only for the life of the policy. As these policies tend to last a maximum of 30 years, younger policyholders may do well to spring for a money-back plan. But older buyers might consider more insurance from a cheaper plan without the option of premium return.

Moreover, as Psychology Today points out, the difference in premium costs between traditional term policies and return-of-premium policies is money that could be invested. By paying extra money to an insurance company, you're allowing your insurer to keep the investment earnings that you could pocket by investing that money on your own.