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Is a return-of-premium rider worth it?
This rider may seem like a great deal, but its benefits may not beat out its price.
You’ve probably already noticed that there are several distinct types of life insurance, and within those types are add-ons available called riders. These riders offer everything from accelerated benefits to premium waivers. But what about return-of-premium riders? We’ll cover what exactly these entail, how they might be beneficial and where they come up short.
What is a return-of-premium rider?
A return-of-premium rider is an add-on to a term life insurance policy that guarantees the return of the premiums you pay each month if you outlive the policy. Paying into term life insurance comes with the chance that you’ll lose the premiums you’ve paid if you outlive it, but this rider nulls that risk.
How does a return-of-premium rider work?
Let’s say you buy a 20-year term life policy with a return-of-premium rider. If you die during that term, your beneficiaries will receive a death benefit. But if you outlive the policy, you’ll get a refund of all the premiums you paid. Typically, that refund isn’t taxable.
To compare, you won’t get any money back if your standard term life insurance policy expires.
The costs of a return-of-premium rider
This convenience comes at a price. You can expect to pay around 30% more in monthly premiums to add a return-of-premium rider to your policy.
Pros and cons
- Money back. If you outlive your policy, you’ll walk away with the money you paid in premiums.
- Tax-free payment. The refund isn’t taxable.
- Expensive. You might pay up to 30% more to add this rider to your policy.
- Doesn’t earn interest. The money will be returned to you without any interest paid.
- Must maintain coverage for the entire term. If you cancel your policy before the end of the term, you might not get a refund of any premiums you paid.
- Rare rider. Many of the biggest life insurance companies don’t offer return-of-premium riders.
Find a life insurance policy that offers a return-of-premium rider
Term vs. permanent life insurance
Permanent life insurance lasts as long as the name implies. You’re covered as long as you pay your premiums, and the benefit is paid once you die. Permanent insurance may also build cash value, depending on the policy and provider.
Term life insurance works a bit differently. You buy coverage for a certain amount of time. The length of the terms can range from 10 to 30 years, usually in five-year increments. Unlike permanent life insurance, there’s no cash value, but premiums are generally lower.
Does a return-of-premium policy build cash value?
Some insurers, like State Farm, offer return-of-premium policies that build cash value – but they’re few and far between. With these policies, a portion of your premiums will be invested so your policy becomes a cash asset over time. Once you’ve accumulated enough cash value, you can begin to take out loans against the policy. But if you outlive the policy and haven’t paid back those loans, the insurer will dock that amount from your refund.
Should I get a return-of-premium rider?
Whether or not you should get a return-of-premium rider depends on several factors. Here’s what you should consider as you’re researching policies and riders:
- Price. Arguably one of the most important factors is the overall cost. Getting money back is great, but the upfront premiums need to fit within your budget. You’ll pay more for a return-of-premium rider.
- Convertibility. Using a return-of-premium rider to make you feel like you haven’t wasted money may not be necessary. Some term life insurance policies can be converted to permanent policies once the term is up.
- Coverage options. A policy that allows for a return-of-premium rider may not have the amount of coverage you need, or additional riders you’re seeking. Look at the whole picture to ensure you’re considering all of the moving parts.
- Return amount. Money often loses value over time, and $500 bought you more 10 years ago than it would today. When you apply that to 20 or 30 years, the value of your return may be considered significantly less than when you initially paid in.
Can I still convert my policy if I have a return-of-premium rider?
It depends on your insurer. If your term life policy also has a conversion feature, you should be allowed to convert your coverage to a permanent policy. You’ll need to do this before a deadline, which is usually within five years of taking out your policy, or before your 65th, 70th or 75th birthday.
A return-of-premium rider seems like a great deal at first glance, but the complexities around it prevent it from being an instant must-have addition. What you’re able to afford, if you can convert your policy and other such factors all play a part in how well of a fit it might be. Before you settle on a policy, be sure to compare your options to make the decision that takes into account your family’s needs with our comprehensive guide to life insurance.
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