Unlike car insurance, life insurance is optional and in today’s market, there are plenty of options available. Return of premium life insurance has been around for some time but you would be forgiven if you haven’t heard of it.
Here we take a look at this interesting and somewhat unknown alternative to the two main types of life insurance.
What is return of premium life insurance?
Think about return of premium (ROP) life insurance as a long-term savings plan but with the peace of mind that traditional life insurance provides. To understand ROP insurance you need to know how term and whole life insurance works.
This is probably the easiest type of insurance to understand. As the name suggests, this covers the policyholder for payment regardless of when they die. This is sometimes referred to as an ‘assurance’ product because the policy guarantees a pay-out upon death.
When you take out this type of policy you choose a specific length of time, or term, that you want your life to be insured for. This term could be 10, 20 or even 50 years and should you die within the term, a lump sum is paid out.
Once the policy term ends then cover is terminated and any money you have paid in is gone. This means you have paid in for a number of years and haven’t seen any benefit.
An ROP policy is different, you will get back some if not all of the premiums you have paid over the years.
At this point, you might wonder why this type of cover only makes up 5% of life insurance sales. You may even be considering life insurance and think an ROP policy is a no-brainer – not so fast. Just like any financial product, there are pros and cons that you should be aware of.
What are the pros?
The most obvious pro is the lump sum that is paid out should you survive the agreed terms. For the most part, the sum returned will be all of your premiums paid in over the term but you should check the terms of the policy. The premium returned is also tax-free so there will be no surprises. Because an ROP policy acts like a savings account you are forced to add to it each month. The amount you pay each month will be lower than a whole-life policy which means it may be a more accessible option for some. Just like a regular term policy you have the flexibility to choose a term that suits your circumstances. Figures from Money Supermarket reveal half of all people searching for life insurance are aged between 26-40. If you look at an ROP policy as a type of savings account then adding to those funds for 20 or 30 plus years might be appealing.
How about the cons?
While premiums are lower than whole-life cover, an ROP policy could cost up to 30% more than a standard term life policy.
On top of the higher premiums, cancelling a policy early could result in a smaller refund and in some cases no refund at all. It’s important to know that money you pay in does not gain interest which is why it’s not uncommon for people to take out a standard term policy and invest the price difference elsewhere.
Another issue with an ROP policy is availability. Not all life insurance providers will offer this type of policy because they cost the business more money. Those that do offer this type of policy will often have different terms so it is important to read the details carefully.
With so many variations and niche products on the market, picking the right life insurance policy can be tricky. To find out if a return of premium policy is right for you, speak to an IFA. You can contact us on the form below and one of our experts will contact you and guide you through the process.