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.
You do have to pay for this convenience, and it’s likely going to be a hefty markup – around 30% more in your monthly premiums. It should also be noted that given the refund is a return of your premiums rather than a payout, it’s generally tax-free.
Because these riders only take effect when you outlive the policy, they’re unavailable for permanent life insurance. As far as we can tell, you can’t outlive something that doesn’t end.
Pros
- Returns premiums. The first and most obvious pro is that outliving your policy doesn’t mean walking away without any money. Your premiums are returned to you, even if certain other costs associated with the policy aren’t.
- Tax-free. Often there’s no tax assessed on returned funds, as it’s closer to a refund than a benefit payout.
- Term life insurance is generally less expensive than permanent. Permanent life insurance typically comes at a higher cost, and when you’re young it may not be as appealing. Car payments, a mortgage and everyday living costs can make a $1,000 per month premium completely out of budget.
Cons
- Your money isn’t returned for upwards of 30 years. While you’ll get the premiums back, it takes until the end of the term. Money can lose value in that time, and you can be left with less purchasing power than you had when you started the policy.
- Coverage amounts may be more limited. It’s likely that you’ll have fewer options when it comes to term length and how much coverage you can buy.
- Higher price. While not as expensive as permanent life insurance, you’ll still be paying more for a return-of-premium rider than you otherwise would.
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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.
What’s the difference between term and whole life insurance?
Return-of-premium policies
A rider is an additional item that’s tacked on to a policy, but you can also find return-of-premium policies. Instead of a distinct cost being added onto a policy as it is with a rider, the premiums are raised to accommodate the benefit.
Any additional costs added to a return-of-premium policy, such as riders, likely won’t be refunded if you get a return of your premium. As with the rider, the returned amount is generally tax-free.
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.
Bottom line
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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