What Is A Return Of Premium Life Insurance Policy?

Life insurance is a critical part of a financial plan just like homeowners insurance for a newly bought home, or finding a commercial insurance broker to get a policy for your new business.  Usually, an insured person has other persons who are financially dependent on him or her.  Without life insurance, there would be no way to protect these dependents from the financial hardships associated with the death of the insured.  Life insurance is not just used by families, but it is also used by businesses.  Sometimes, a business owner will insure the life of a key employee.

Life insurance comes in two broad forms: temporary life insurance and permanent life insurance.  Return of premium life insurance is a type of temporary life insurance.  Temporary insurance is otherwise known as “term insurance.”  A return of premium term life insurance policy is characterized by the fact that premiums are paid either over the course of the insurance coverage or at the beginning of the coverage in a lump sum form, but they are then returned to the policy owner after the return of premium term life insurance expires.  Many people feel that this is “free insurance,” and in a sense it is, but people who think this way are ignoring the time value of money.

Inflation will diminish the value of that amount of money in the future.  Therefore, the present value of that money is more valuable than the same amount in the future.

Insurance companies make their money by using this time value principle of money.  They take your money, invest it, keep the profits, and give you back your premium.  They’re the ones who really made money for free.

When looking through return of premium life insurance quotes, you will see they are, on average, less expensive than the average non return of premium life insurance quote would be.  This is because the insurance company only makes money on the investment profits, not the premiums you are paying.  They have to make up the difference in the amount they charge you.  So, don’t be surprised when they are more expensive than non return of premium life insurance.

These policies are really suited for people who really need the money back, and who cannot afford to not get it back.  Otherwise, these persons would be better suited to get a regular term insurance policy or a permanent policy.

One last thing must be noted as some life insurance advice.  Occasionally, policies of any type are surrendered for their cash value, and the policy owner gets back the cash value in the policy.  This is often confused for “return of premium” life insurance, but they are not the same.  The cash value will not equal the entire value of the total premiums, as the premiums also included administrative costs and covered the amount at risk, as well.

To be comprehensive with your life insurance knowledge, you also should know the differences between term life insurance vs whole life insurance.

Other insurance posts you’ll find useful:

Low cost term life insurance

1035 Exchange

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