Return of premium life insurance - Innovation
Return of premium life insurance is an interesting alternative to term life insurance for those who have confidence that they can keep their insurance for the full term. How does return of premium life insurance work? When you buy term life insurance you get a low premium for a number of years. If you outlive the term insurance your money is gone. What return of premium term life insurance does is give term life insurance for the period of time (15, 20 or 30 years) and if you keep it for the entire term period the insurance company returns all of your premiums paid. How and why does an insurance company do this? First of all, the premium paid is more expensive than term life insurance policy for the same period of time. Also, not everyone keeps their policies so the insurance company has received more money than a regular term policy and keeps that, which helps them pay the people who do keep their return of premium policies. Also, whole life or universal life has cash value that is like a return provision along with other advantages and disadvantages. The biggest advantage is that a whole life policy is guaranteed to last for life. Also, it can build large cash values and the interest growth is tax deferred. The biggest disadvantage - it’s a lot more in initial cash outlay than term insurance and more than return of premium life insurance. One way to calculate if return of premium is worth it is to take the premium for a return of premium policy and compare it to the cost of a term life policy for the same period of time. Take the difference paid per year, compare it to the value returned to you at the end and do a calculation for the rate of return on that overpayment. You can see a Forbes article on return of premium to see how that would work out. One warning: If you’re not very sure that you can keep the policy I wouldn’t get a return of premium policy or a permanent life insurance policy such as whole life or universal life insurance.