Return of Premium Term Life Insurance

If you’re looking for life insurance, return of premium term life insurance might be something to consider as an alternative to traditional term life insurance or whole life insurance (the two most common forms of life insurance). Term life insurance is the simplest form of life insurance, as there is no investment component -- it is just life insurance. Whole life insurance is not only a life insurance policy, but it is an investment as well, and it is vastly more expensive because of this investment aspect. In most cases whole life insurance is a bad decision, as it makes your insurance terribly expensive and it doesn’t operate that well as an investment.
Since most people who buy life insurance should focus on term life insurance, we’ll compare a standard term policy with the return of premium term life insurance. These are both solid options for many people and they should both be weighed as realistic alternatives when you speak with your life insurance broker.

Term Life Insurance

Term life insurances and return of premium term life insurance are mechanically similar:  the consumer purchases a policy for a set number of years, referred to as the term.  This term is usually in increments of 10 years, though it can be any number of years generally from one to thirty.  The consumer buys the policy based on a certain face value or death benefit.  This is usually in increments of $100,000, though it can be in almost any value the insurance company wants to sell you.  So you might hear someone say, “I have $500,000 of life insurance”; what they mean is the face value of their insurance is $500,000.  This would be paid out to their beneficiaries if they happened to die during the term of the insurance.  Finally, the consumer pays an amount each year to actually buy the insurance and keep the policy in effect.  This is known as the premium.  In a traditional term life insurance policy, this premium is paid each year and it is a true expense -- they will never see any of that money back; it only serves to keep the policy in effect. 

Return of Premium Term Life Insurance

Return of premium term life insurance is fundamentally similar to regular term life insurance, however it differs in one major way: the premiums that the consumer pays will be returned to them in one lump sum at the end of the policy, often tax free, assuming the consumer did not die during that term (and therefore the insurance company paid out the policy face value to their beneficiary).  
This sounds too good to be true, right?  Well, there is more to this policy than meets the eye, but it is an intriguing option that deserves further scrutiny.  It is important to note that term life insurance is by far the least expensive option for life insurance and it provides a great value.  A healthy 30 year old male or female can expect to get $500,000 worth of coverage for about $500 a year.  So for $40 a month you’re making certain that your family will not have a financial nightmare if you pass away suddenly.  While that is good enough for most people, others look at the $15,000 that you will pay out over the course of the 30 years and be frustrated that they made a “bad bet”.  
Return of premium term life insurance is much more expensive than term life (usually around 50% more), but what happens is that the insurer invests that additional money and then guarantees that you will receive the exact dollar amount of money back that you spent at the end of the policy.  In our example the $15,000 that you would have spent for term would be increased by 50%, so $22,500.  At the end of the 30 years you would get a check back for $22,500 and you would walk away with that tax free (in most cases).  
This type of policy seems like a no-brainer, but don’t be so hasty.  The actual question is if you invested that money yourself, would you have more than $22,500 at the end (after taxes)?  That’s a question you won’t know the answer to, but most financial advisers would suggest that you would in fact have more than that.  But it is certainly reassuring to know that you would get that money back and that would feel fairly satisfying to know that not only is your family covered, but that you’ll “get your money back” at the end of the policy.  
You should strongly consider this option and review it with your insurance agent.  Unlike most types of new and gimmicky life insurance, return of premium term life insurance is something to consider, especially if you are someone who is prone to second guessing your decisions.  This seems like a no-lose proposition to most people and can be a valuable additon to your financial life.