Get your premiums back with the return of premium benefit

Term life insurance is perhaps the cheapest type of life insurance. However, once the policy ends, you will not be getting back any of the premiums you have paid for the coverage. If you die within the coverage period, your beneficiaries will receive the sum insured. If you outlive the coverage period, there will be no benefit payments and you can say “goodbye” to the premiums paid.

It’s a “live and lose” matter. You see, the premiums are already considered “spent” – you paid for the insurance company to cover the risk of your dying within the coverage period. Admittedly, the probability of this happening (dying within the limited coverage period) is small, that’s why the insurance coverage provided is priced low.

Indeed, term life insurance is cheaper than the other types of insurance, particularly if you are young and healthy. The drawback with this is that if you survive the coverage period, there isn’t anything you have to show for your premiums. If this is a concern, you can consider getting life insurance with return of premium option.

This benefit or rider allows you to get back all or a portion of the premiums you have previously paid throughout the life of the policy. Please note that getting a return of premium rider may increase the overall premiums by an average of 20 to 30 percent, and may even reach a high of 40 percent.

Is it worth it?

The question is, is tacking on 20 to 40% of the premiums worth it, in order to get the premiums back? The answer is up to you.

You have the following options:

• Get the Return of Premium Benefit Rider.

  This tacks in an extra 20 to 40%. You will receive a refund of the premiums you paid tax-free.

• Invest the premiums for the ROP.

  Even with a conservative investment strategy, one can look for investments that can earn a 5% income. However, more often than not, you will need a bigger chunk of money at the onset for you to have more attractive investment options. Of course, taxes will be levied on the earnings.

• Get a cash-value policy.

  A cash value life insurance policy is more expensive than a term life insurance policy but has an investment component. This means that over the years, there is a cash value build-up on the policy. A longer policy term will mean more time for the cash value to grow. The cash value is also allowed to grow on a tax-deferred basis. As long as you don’t withdraw your cash values and allow it to grow, that fund is not considered taxable.

Weighing Your Options

You need to determine whether, at your given age, it is better to go with the term life or with the whole life plan. The following factors should be considered in your decision:

• Your age.

  For term life, you will have much cheaper premiums but as you get older, the premiums for term life will also grow.

• Your health condition.

  While you’re enjoying good health, term life (with a return of premium option) is advisable.

• The number of years of the policy.

  A 10 or 15-year life term with a return of premium option is more advisable since this has less time for inflation to eat up the refund of the premiums.

• Your attitude and habits with regards to savings.

  Do you have the discipline to actually save up the premiums you could have paid for an ROP option? Or does one month pass by without you noticing that you have actually spent this amount on coffee and movies? With regards to the term life premiums you paid, are you loss averse? That is, you hate losing money (i.e. the money you have paid out in term life premiums). Or can you treat the premiums you paid out in your term life cover as some kind of rental fee. As with renting a house, you don’t get anything after the contract period, you are just paying for the use of the house.

• Your attitude and habits with regards to investment.

  Are you risk-averse or do you have an aggressive attitude towards investment? If you are risk-averse and would like something guaranteed, then getting a Return of Premium Rider can be attractive. If you would rather put your money in higher-yielding (yet riskier) investments, then saying no to the ROP option and investing this money would be the way to go.

The Return of Premium Benefit rider is just one of the riders you can include in your term life policy, to find out about other riders, click here.

Updated on: 05.06.2013

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