By Elizabeth Renter
With most term life insurance policies, you pay for coverage for a set period. If you don't die within the term of the policy, it ends, there's no payout, and your money is gone.
There is an exception, however -- although it's a costly one. Return-of-premium life insurance provides a refund if you don't die within the term.
The upside of return-of-premium policies
Think of return-of-premium term life insurance as a way to make sure there's a payout, no matter what happens. You make payments every month in the form of premiums. If you die, your beneficiaries are entitled to the face amount of the policy, say $100,000. If you don't die, and your policy term ends, you're entitled to the premiums you paid.
The downsides of return-of-premium policies
The biggest drawback of a return-of-premium policy is the cost. You can expect to pay from 30% more to three times as much for a return-of-premium policy than a regular term policy, according to Trusted Choice, an organization of independent insurance agents.
A number of factors go into pricing an insurance policy, including your health and age. The more features, or riders, you add, the more expensive it gets. And the return-of-premium rider is the most expensive of all, according to Life Happens, an insurance education organization.
These policies accounted for just 2% of all term policies sold in the first half of 2016, according to LIMRA, an industry research group, and an even smaller percentage of the overall insurance market. Cost is one reason for that.
Not all insurance companies offer return-of-premium policies, and you might not be able to get a smaller-value policy with this feature. As with any life insurance, it's important to read the fine print. Expect to find different rules for return-of-premium policies, depending on the insurer. Also, keep in mind that whether you buy regular term or return-of-premium life insurance, if you cancel the policy, you won't receive any money.
When to consider a return-of-premium policy
- You're likely to outlive the policy. If you're healthy and young, there's a good chance you'll live longer than a 20- or 30-year term and have a chance to cash in on a return-of-premium policy.
- You wouldn't otherwise invest or save the extra money. Because your refund won't include any interest, it may be better to buy a traditional term policy and put the difference into a 401(k) at work, for example. But if you aren't disciplined about saving money, a return-of-premium life insurance policy would force you to set aside money each month.
- You can afford the higher premiums throughout the term. If the higher premiums for this kind of insurance are a stretch, consider traditional term life.
While getting your money back for unused life insurance sounds like a great idea, be sure to compare the cost of this feature at multiple insurers to see which has the best deal.
Elizabeth Renter is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @ElizabethRenter.