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What is Return of Premium Life Insurance?

Posted By Jim On 03/04/2010 @ 7:35 am In Insurance | 50 Comments

Life insurance sucks. If you outlive your policy, you spent a lot of money for not much of anything. If you don’t outlive your policy, well shucks you didn’t waste your money on premiums… but you’re dead.

So when my insurance company sent me a package detailing one of their newest offers, a “return of premium life insurance” policy, I was intrigued. The basics of the policy are simple – you pay premiums for term life insurance and if you outlive your policy, your premiums are returned to you. If you outlive your policy, you haven’t wasted your premiums. If you don’t, then the premiums were “worth” it.

What’s the catch?

So where’s the catch? Nothing in life is free, right?

In return for the return of premium piece, you pay higher premiums than you would on a life insurance policy without a return of premium option. The insurance company can take the difference and invest it, thus helping it generate a profit regardless of whether you outlive the policy.

There isn’t a catch but does that mean it’s worth it?

Are Return of Premium Life Insurance Plans Worth It?

I believe it comes down to your approach towards insurance. When you buy non-required insurance, you’re buying peace of mind. For auto and homeowners, you are required to purchase it because of state law or because your lender requires it. For other insurances, like umbrella, accidental death & dismemberment, disability, or life insurance, it’s about being able to sleep at night and not worrying what would happy should something bad happen.

Life insurance is tough because as I said at the onset of this post, if you outlive your policy you feel like you’ve wasted money. You bought insurance but you never needed it. You’re happy about not needing it but you kind of wish you knew you didn’t need it and could’ve saved that money. The return of premium plan gives you the ability to pay for not having to worry about outliving your policy.

No amount of financial comparisons or breakdowns will really help you come to grips with whether you want to do a return of premium life insurance plan or a regular term life insurance plan. If it doesn’t bother you to outlive your policy, then you will probably want a regular vanilla term life plan and invest the difference in premiums. If you think outliving your plan will bother you, a return of premium plan may be for you if it gets you past that mental block and onto a policy you need (of course, if you need it, though I don’t necessarily agree everyone needs it).

If you’ve looked at life insurance, have you considered this option? We haven’t purchased life insurance yet and while this option is intriguing, I think I’d pass on it when the time comes. I’m curious to hear your thoughts on it.

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