4 things to know about the return of premium life insurance

That's where a return of premium life insurance can come in handy. It's a life insurance policy, often available as a rider, that costs more but, if you outlive the policy, the insurer pays all your premiums back to you. Let's dive deeper into a few things to know about return of premium life insurance so you can decide if it's the right policy type for you.

1. Your refunded premiums are not taxed

If you outlive your return of premium life policy and have your premiums refunded to you, they are not taxed. This is because your returned premiums are considered a refund instead of income, which means return of premium life insurance can be a good investment and benefit you later in life if you outlive the policy.

2. They cost more than traditional term life policies

Return of premium policies have higher premiums than traditional term life insurance, so you'll need to budget more for your monthly payments. However, these can be worth the cost. You'll either protect your loved ones if you die during the policy period or get all your money back when you outlive the policy.

3. You may be able to convert to a permanent life policy

Permanent life insurance policies provide guaranteed lifetime coverage as long as you make your premium payments on time. Additionally, they let you build cash value. Part of each premium pays into your cash value, which then grows tax-deferred at a certain rate depending on the type of permanent policy.

In some cases, you may have the option to convert your return of premium life insurance to a permanent life policy. This can be a great option if you decide you still want your life insurance coverage later in life and need an additional investment vehicle. Your premiums may increase to account for your older age, but you won't have to worry about being denied coverage.

4. You can lose your premiums if the policy terminates early

If your policy terminates early for failure to pay premiums, you may not be allowed to get those premiums back, so it's vital to keep up on your premiums through the entire policy term. Depending on the company and policy, terminating your policy early for other reasons may cause you to forfeit your premiums, so make sure you plan on keeping your policy through the entire term.

The bottom line

Return of premium life insurance costs more than traditional term life insurance, but you're essentially buying peace of mind with this type of policy. You either provide financial support to loved ones if you pass away during the policy term or you get your money back. As long as you keep up on your premiums and don't cancel early, there's less risk of losses. Plus, you may be able to convert your policy to a permanent life policy if you want to continue coverage and build cash value. Make sure you weigh your budget against your life insurance coverage needs before deciding if a return of premium policy is right for you.