Is "Return of Premium" Life Insurance
As Good As It Sounds?
Life insurance is often viewed as a necessary evil: a product bought with the hope it will never be used. But as Christians, we understand it's expected of us to take care of our families. In the untimely event of our death, we want our loved ones to be well provided for. Life insurance can be a valuable tool in accomplishing this goal.
The concept of life insurance is simple; pay a small, regular amount of money now, and in the event of death your family receives a large lump sum of money to cover their future expenses. While the concept might be easy to understand, the multitude of insurance products can easily cause confusion.
Term insurance is the cheapest and most basic type of life insurance. As the name implies, it lasts for a set period of time, or term. After the term is over, the insurance loses its entire value. For example, let's assume you purchase a 30-year term life insurance policy with a $1,000,000 death benefit. If you die in ten years, your beneficiaries would receive a lump sum of $1,000,000 from the insurance company. But, if you die in thirty-five years, your beneficiaries would not receive any money from the insurance company, because the policy was only in force for thirty years.
The potential of not receiving any money from the life insurance company is a significant drawback of term life insurance. This leads some to view term life insurance as a lose-lose proposition—to receive any benefit from your purchase you have to die first. Because of this drawback, insurance companies have designed a life insurance product called return of premium life insurance. Return of premium life insurance works just like term insurance but comes with a bonus feature. At the end of the term, the owner of the life insurance policy receives the full amount of premiums paid during the term. For example, let's assume you purchase a 30-year return of premium life insurance policy with a $1,000,000 death benefit, paying annual premiums of $1,000. If you're still alive after thirty years, you'd receive $30,000 (30 years x $1,000) back from the insurance company.
As you might suspect, this added bonus feature makes a return of premium policy more expensive than basic term insurance. According to AIG, for a healthy thirty year old male, a 30-year term life insurance policy with a death benefit of $1,000,000 would cost $830 annually. Over thirty years this policy would cost $24,900. However, a return of premium life insurance policy with the same parameters would cost $1,330 annually. Over a thirty year period this policy would cost $39,900. But this buyer would get the entire $39,900 back if he is still alive after thirty years.
On the surface, this might sound like a pretty good deal. But let's consider this "good deal" from another angle: what happens if you purchase the term insurance for the lesser amount and invest the difference? By taking the annual difference of $500 ($1,330 - $830), and assuming a conservative annual growth rate of 8%, the total amount of these small annual investments would grow to more than $61,000 over the 30-year period. By investing the difference you come out ahead by $21,100 ($61,000 - $39,900). Plus, not only do you have the potential to make a great deal more money, but you remain in full control of your money. It's impossible to know what opportunities will come your way or what disasters may arise. By investing the difference, your money isn't tied to an insurance contract for many years or decades.
There is also a significant stipulation that comes with the guaranteed bonus feature offered by return of premium life insurance. The guarantee actually does not mean you always get back all the money paid in. If you cancel your return of premium life insurance before the policy has been in effect at least five years, you'll likely not get any premiums returned. Most policies will return a portion of premiums paid on cancelled policies owned longer than five years, with the percentage increasing the longer the policy has been in effect.
Although the guarantee of receiving money back from the return of premium might sound appealing, it's not the best solution to a life insurance need. As illustrated, the guaranteed return of premiums feature is a "second best" option. The better alternative is clearly buying term and investing the difference (assuming you have the discipline to follow through and not spend the premium savings). You'll remain in control of your money and likely end up with far more money in the end than just a return of what you paid. That way, even if you never receive any money back from your term life insurance, you'll be able to consider yourself fortunate to have outlived your life insurance, and have a nice investment account balance as well. 
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