Return of Premium Life Insurance
Financial needs and behaviors change over time. Many people are disciplined enough to stick with their financial plans. Some people,however, find it a bit challenging to design their lifestyle to achieve a strong financial security.
If you are one of those who belong to the latter group, a return of premium life insurance policy can help you achieve financial security.
It is estimated that 26% of adult Americans do not have an emergency fund and 36% have not yet started saving for their retirement. In 2012, the average savings rate for Americans was 10.5% of their earned income. It is troublesome to note that this figure significantly dropped to 4.4% in 2014. These figures can spell disaster.
The millennials are the generation most at risk with most of them having an average savings rate of only 2%. This means they are living way beyond their means, spending more than the amount they are earning.
Return of Premium Life Insurance Policy
A return of premium life insurance policy can be both a savings and an insurance policy. It is part of a term life insurance policy that offers a way for the policy holder to recoup premiums paid that would be forfeited in favor of the insurance company when your policy was enforced.
A return of premium life insurance policy is 4 to 5 times more expensive than a traditional term policy. It however comes with these benefits:
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Premiums paid will be reimbursed at the end of the term of the policy or to your beneficiary if your policy outlives you.
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A more stable and guaranteed investment that forces the policy holder to save for the future
Despite these benefits, it is still a better option to invest the difference between a traditional term life insurance policy and a return of premium life insurance policy in other types of retirement plans.
Many people however do not have the knowledge or discipline to make this type of complicated financial decisions. This makes getting a return of premium life insurance policy a more viable option.
While this life insurance policy is not the best option for everyone, it will work well for those who want to recoup their money at the end of the term of their policy. It can also be a good option for those who want to offset some of their debt or use the proceeds for their retirement.
Is a Return of Premium Life Insurance for You?
Consider these:
Pros
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It is an ideal option for those who want a saving plan.
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It is an ideal option for those who want their premiums paid back to them if they outlive the term of their insurance policy.
Cons
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It does not accumulate interest
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It is more expensive (up to 5 times) than a traditional term life insurance policy
A return on premium life insurance policy is best for individuals who do not have the discipline to save for the future.
If you are not so sure on how a return of premium life insurance will benefit you, trust your personal Aha shopper to full explain every detail of this insurance policy. It may be that a different type of coverage may be a better option for you.
It is the job of your insurance agent at Aha to answer all your questions and guide you in choosing the right life insurance policy that suits your needs, unique situation, and budget. You will not be pressured to buy any life insurance policy if you are not yet ready to do so.
FAQ about Return of Premium Term Life Insurance
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What is a return of premium term life insurance?
A return of premium term life insurance is an insurance policy wherein you will be able to recoup a part or all of the premiums you paid to the life insurance company should you outlive the term of your policy.
With a traditional term life insurance, the life insurance company keeps the premiums you paid.
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How does a return of premium term life insurance work?
A return of premium life insurance refunds a portion or all of the premiums you paid the life insurance company. This is your benefit for not using your policy.
The premiums you pay for a typical term life insurance company provides you with coverage. When you outlive the term of your life insurance policy, premiums you paid means profit for the company, it is not paid back to you.
The life insurance company invests the premiums you pay them. The income generated from the investments is what they use to pay claims of policy holders and for their business operations.
A life insurance company only pays out a measly average of 2-3% of term insurance policies. When you outlive your term life insurance, the life insurance company makes money because they will not have to pay for your death benefit. The same thing happens when you surrender or let your term life insurance policy.
A return of premium life insurance has a higher monthly premium because the life insurance company has a limited amount of time (up to the end of the term of your insurance policy) to maximize the profits that can be derived from your premium payments.
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Do I have to pay taxes for a return of premium term life insurance?
You do not have to pay taxes when you receive a refund from your return of premium term life insurance. This is so because the premiums you paid did not earn any interest thus it is not an income generating investment. It is similar to getting all monies you paid in one lump sum.
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Why does a return of premium term life insurance have higher premiums?
Life insurance companies charge higher premiums for a return of premium policy because they will eventually have to pay back your premiums if you outlive your term life insurance policy. They invest your premiums to help offset the loss they will incur when they return your premiums.
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Is return of premium term life insurance a rider on a standard policy?
It is not exactly an add on (rider) on your standard term life insurance policy aimed to provide additional coverage. If your life insurance company has a return of premium feature, you will find such a provision under the additional riders section.
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Is a return of premium term life insurance an ideal choice?
A return of premium policy is an ideal choice for individuals who do not have the discipline to invest and save money. It is also ideal for those who do not mind paying higher premiums to get a refund of premiums paid should they outlive the term of their insurance policy.
Individuals who have the knack of investing their money into other investment portfolios are better off with a traditional term life policy. They can invest the difference in premiums on their own.
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Is a return of premium term life insurance better than a whole life insurance policy?
Insurance and financial professionals will have conflicting answers to this question. This is so because you are comparing apples and oranges or two life insurance policies with different advantages and disadvantages. To determine which is better depends upon the needs of the policy holder.
Premiums of a return of premium term life and whole life insurance policies are higher than traditional life insurance policies. The main advantage of a whole life insurance policy is it provides protection for your lifetime. The dividend you may earn from a whole life insurance policy quickly builds cash value that increases the face value of your policy.
Having a return of premium term life insurance policy means at the end of the term of your life insurance policy, you will get a refund of all premiums paid without any interest. This also means that with the rising rate of inflation the amount paid back to you will have less buying power today.
