Return of Premium Life Insurance To Protect Your Principal
A major hurdle for many people to overcome is deciding that their term life insurance policy has been worth the money that they have spent on it. A financial product that allows some of that concern to dissipate is return of premium life insurance. Return of premium life insurance was created to provide the investor a fallback in case they don’t actually need the death benefit during the term of their contract. The life insurance policy is setup to return the premium to the account owner upon contract termination, thereby providing a safety net that allows the return of premium life insurance to protect your principal.
The Nature of Return of Premium Life Insurance
The very nature of return of premium life insurance is to offer the investor a return of money that they may otherwise consider wasted if they don’t die under the contract term. During this period, the investor is not actually wasting money per se. What they have done is purchased peace of mind for their families and Insured themselves against risk. The premium they have paid is therefore the cost of the risk protection. As with many other types of insurance for example, they are simply securing themselves from the risk of death (or accident).
Return of premium life insurance offers an opportunity for the insurance contract owner to recoup the expense of funding the insurance over the term of the contract. In order for the insurance companies to be able to offer such a product, you can expect to pay higher yearly premiums for the contract. These extra premiums make up for the cost to the insurance company of returning what you place into it.
The insurance company’s profit on these types of accounts comes from the investment dollars that they are earning upon your investment. You are more or less arranging for the insurance company to hold your funds in the life insurance policy until you desire the premiums returned to you. During this period the insurance company is able to use the funds however they see fit (this is only to some extent; they are still under strict state regulations as to how they can invest the funds). The advantage to you is that you receive protection during the period that the insurance company holds your funds.
Types of Return of Premium Life Insurance
The primary type of return of premium life insurance is called return of premium term life insurance or rop life insurance. The reason that this type of return of principal is primarily term insurance deals again with the nature of the contract. It doesn’t make much sense to return the premium on a whole life contract, as the likelihood of outliving your contract is slim (wink).
As such, there are two standard ways in which return of premium term life insurance is offered. The first is to provide the return of premium provision directly into the contract. This way the insurance product is setup to only be a rop term life contract.
The second method is to attach a rider to the contract. The rider stipulates the conditions in which the premium is returned to the contract holder and also lays out the percentage that will refunded the account holder. This leads us to the next section of the article.
How Much Premium is Returned From the Life Insurance?
The return of premium in the insurance contract is determined by either the contract terms or the associated rop rider. You may purchase the option to have the full premium payments returned at the end of the contract, or you may stipulate that only a portion of the premiums be repaid. The question that must be asked is why wouldn’t you want the full premium returned? The answer is simply because of the cost. The more you want returned the more that it is going to cost in yearly premium payments.
The other option to consider in these types of contracts, is what happens if you terminate the contract before the end of the term? Do you get any of premium payments back? The answer: it depends. There are a couple of factors that go into whether or not you are going to have the full, part, or none of the premium returned.
Many insurance companies will provide a stepped approach to returning premium on the life insurance policy. The earlier in the contract the owner terminates, the smaller the percentage of the premium that is returned. Other companies restrict return in the first couple of years of the contract.
One of the best aspects of return of premium life insurance is that the premiums are returned to the account owner tax-free. You don’t have to worry about your premiums being tax twice, once upon entry and once upon exit.
Summary
As with anything else, you will need to take the time necessary to sufficiently shop around and weigh your return of premium life insurance options. Not all policies are created equal, and not all insurance companies are created equal. Also be aware of recent legislation that is making it less appealing for insurance companies to even offer this type of insurance. You can expect the cost of the rop life insurance contracts to continue to increase.
Return of premium life insurance can be a very appealing addition to typical term life insurance policies, particularly if the investor expects to outlive their current term insurance.
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