Why Return of Premium Life Insurance is a Bad Investment

Return of Premium Term Life InsuranceToday’s life insurance policies often come with many bells and whistles, offering policy holders some options that might even sound too good to be true. One case, having all of your premiums returned if you survive the term of the policy, may be a prime example – unless you know where to look for the hidden costs.

There are dozens of different kinds of life insurance policies that you can choose from, all of them have different advantages and disadvantages that you’ll need to weigh based on your own situation. There is no “one plan fits all” that is going to work with everyone. Each person needs different coverage based on their family and preferences. We know that it can be a long and difficult process trying to find the perfect plan to fit your needs, but we are here to help.

What Is Return Of Premium Life Insurance And How Does It Work?

Return of premium life insurance is a type of coverage that will return the premiums that were paid in for the coverage if the insured on the policy survives throughout the entire “term,” or time period, of the policy.

With this type of policy, you are guaranteed that either your beneficiary will receive the death benefit or that you will receive your premiums back. Oftentimes, these plans are marketed to those who believe that term life insurance is the best type of coverage to own, yet don’t want to take the chance that they will pay premiums into the plan for years without any type of return should they outlive the term of the policy.

When an individual purchases a term life insurance policy, the coverage will typically range from between 5 and 30 years. The premium that is due for this coverage is based upon the insured’s age and health status at the time that he or she applies for the policy.

If the insured were to pass away during the time that the policy is in force, the named beneficiary (or beneficiaries) will receive the death benefit proceeds. If, however, the insured remains alive past the policy’s stated time frame, or term, then the coverage will expire. In this case, there are many insureds who feel that they will have “wasted” their premium dollars.

Factoring In Opportunity Cost

While return of premium policies do provide the chance to receive one’s premiums back, they do so at a higher premium cost up front. Therefore, before going headlong into a return of premium life insurance policy, it is important to factor in the opportunity cost of the additional funds that you will need to put forth into the policy in order to obtain the guarantee.

The example below shows the quotes for a $1 million term life insurance policy quote for a 35-year old male who is a healthy, non-smoker. These figures show both the premium cost of a regular term insurance policy, as well as the premium cost of 15, 20, and 30-year return of premium policies.

As it can be seen here, while the return is not negative, it is still barely high enough to beat the historical rate of inflation. Given this information, in most cases, it would make more sense for an individual to purchase a regular term life insurance policy and invest the “difference” somewhere else.


Annual Term Cost

Annual Cost of ROP


Total Premium




















Other Criteria To Consider

In addition to pure return, there are other criteria to consider as well when determining whether or not to go with a return of premium life insurance policy. Other factors should include:

  • Loss of flexibility. There may come a time throughout the term of your policy when you come across a cheaper form of coverage. Unfortunately, with a return of premium plan, you are essentially “locked in” for the long term. This is because if you cancel before your policy’s term is up, you lose the guaranteed right to receive your premiums back.

  • The insurer itself. The insurance company making the guarantee is also important, because if it were to go out of business, it is highly unlikely that its policy holders will get all of their premiums back – and possibly even not any of them.

The Bottom Line

Although return of premium life insurance may at first appear to offer you a nice guarantee, it is important to thoroughly understand how the product works, as well as whether or not you are truly receiving any real benefit at all. In most cases, this type of policy will cost more in up-front premium due to its return of premium guarantee.

In addition, in many instances, even though you may receive your paid-in premiums back, you will either break even – or even lose a small percentage of money due to inflation. With this in mind, you should make a careful comparison with how much could be earned if you invested the difference in premiums into a safe, long term investment where you could access your money regardless of whether or not you keep your life insurance coverage in force.

It’s vital that you get the life insurance protection that your family deserves. In most cases, there are other life insurance options that are going to be a better option. If you’re looking to get life insurance at an affordable price that isn’t simply a return of premiums, a term life insurance plan is going to be the best option.

These plans are a great way to get life insurance coverage for your loved ones. They are bought with a pre-determined expiration date, after that point, the plan is no longer effective and you’ll have to reapply for life insurance coverage.

If you have any questions about return of premiums policies or some of the other options for life insurance coverage, please contact one of our agents today and we would be happy to answer those questions and ensure that you’re getting the best plan to fit your needs.

Call us today for a quote at 1-888-552-6159.

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Liran Hirschkorn is an independent life insurance agent. His mission is to help individuals across the U.S in finding the best rates on life insurance as well as helping those that have previously been declined get approved for coverage. Liran looks forward to speaking with you about your life insurance needs.

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