How To Get Money Back From Life Insurance Policies

Life insurance is a financial safety net for your family in the event of your death. But what happens if you outlive your policy? In most cases, you won't get any money back once your term life insurance policy ends. However, there is an option called return-of-premium (ROP) life insurance that refunds your premiums if you outlive the policy term. This type of policy is more expensive than traditional term life insurance, but it can provide added financial protection for your loved ones and peace of mind for yourself.

Return of Premium (ROP) Rider

The ROP rider is a form of savings or investment that guarantees a death payout or a return of premiums if you outlive the term. It is especially useful for risk-averse individuals who want financial protection for their loved ones and can afford the increased monthly premium.

The rider is not a standard feature and typically costs extra. The extra money spent on higher premiums could be a significant amount, and this money could be invested elsewhere to potentially earn a higher return. Additionally, if you decide to cancel your policy before the term ends, you will usually not get a refund of your premiums.

The refund from the ROP rider typically covers the base premiums and may not include extra premiums paid for things like substandard rates due to health issues or risky hobbies, or fees for additional riders. The money back from the term life insurance may not be taxable, unless there is a gain, so it is important to consult a financial advisor to understand the potential tax implications.

Eligibility for an ROP rider depends on factors such as age, health, lifestyle, and policy terms. Many insurers have a maximum age limit for issuing new policies with an ROP rider, often between 45 and 60. People with severe or chronic health conditions may not be eligible or may face higher premiums. Lifestyle factors such as smoking, alcohol consumption, occupation, and hobbies can also affect eligibility and cost.

Some companies that offer ROP riders include:

• AAA Life Insurance
• Cincinnati Life
• Country Financial
• Illinois Mutual
• Lincoln Financial
• Mutual of Omaha
• Pacific Life
• Protective
• State Farm

Whole Life Insurance

If you need to, you can also get the entire "cash value" of your whole life policy by cancelling or "surrendering" the policy. That will require you to pay income taxes on the money, and you may have to pay "surrender fees" to your insurance company. Surrendering your policy means you are giving up the right to the death benefit altogether.

If you have the means, consider other options before using your life insurance policy for cash, such as borrowing against your 401(k) plan or taking out a home equity loan.

Term Life Insurance

There are a few instances where you may be able to get your money back from term life insurance:

Cancelling During the Free-Look Period

If you cancel your term life insurance policy within the free-look period, which is usually between 15 and 30 days from the start of your coverage, you are entitled to a full refund of any premiums paid.

Return-of-Premium Rider

You can add a return-of-premium (ROP) rider to your term life insurance policy. This optional add-on will refund all or a portion of your premiums if you outlive the policy term. However, it may increase your monthly premiums.

Cancelling Pre-Paid Premiums

If you pay some of your premiums ahead of schedule and then cancel your policy, the insurance company should return those early pre-payments.

Convert to Whole Life Insurance

Many companies allow you to convert your term life insurance policy into a whole life insurance policy up to a certain age. Whole life insurance policies have a cash value component that grows over time, allowing you to access a portion of the premiums you pay as a cash source. However, cancelling and cashing out a whole life insurance policy may be subject to surrender charges and taxes.

Getting a refund on term life insurance

Term life insurance is a type of insurance that offers coverage for a set number of years. It is generally more affordable than whole life insurance and offers a high level of coverage. However, after your term ends and your coverage is over, you might wonder if you can get any of the money you paid back.

In most cases, you cannot expect to get any money back after your term life insurance expires. This is because term life insurance premiums are almost never refunded, even if you cancel your policy. This is how insurance companies are able to keep term life premiums lower.

However, there are a few instances when you may be able to get a refund on your term life insurance premiums:

• By law, if you cancel within 30 days: If you cancel a term life insurance policy within 30 days of purchasing it, the company must refund your money by law.
• If you pay premiums ahead of schedule: If you pay some of your premiums ahead of schedule and then cancel your policy, the company should return those early pre-payments.
• Return-of-premium rider: You can add something called a return-of-premium rider to your policy, which ensures that all of your premiums are refunded after your term expires. This is an additional benefit that usually comes at a low cost. If you cancel your policy before the term ends, this rider also allows you to recover a percentage of the premiums you paid. Keep in mind that you will only be refunded your regular premium payments, not the actual death benefit of your policy. Additionally, a return-of-premium rider may raise your monthly premiums.

The main reason to buy a return-of-premium rider is risk mitigation. If you are uncomfortable with the idea of potentially outliving a term life policy, the higher cost may be worth it for you. However, it is important to note that you are essentially providing an interest-free loan to the insurer, and if you factor in inflation, the real value of the money you get back will be less.

A better option may be to buy a traditional term life insurance policy and invest the extra money you would have spent on a return-of-premium rider. This way, you can preserve some cash and potentially earn returns on your investment.

Riders and refunds

A rider is an additional benefit to your insurance policy that you can usually add for free or for a one-time fee. If a rider has a fee, it will be tailored to your individual policy but is typically not very expensive.

A return-of-premium rider should ensure that all of your premiums are refunded to you after your term expires. If you cancel your policy before your term ends, this rider also allows you to recover a percentage of the premiums you paid.

The extra premium you pay for the return-of-premium rider guarantees the return of all of your premium payments at the end of the life insurance policy's initial term period.

• You will get all of your premium payments back if you outlive your policy term.
• Depending on your policy term length, your return of premium could line up with your retirement age, providing a benefit around the time you stop earning an income.
• All of the premiums you get back are considered a refund, so they are not taxable.

• A return-of-premium rider can make your term life insurance more expensive.
• If you have to pay a one-time rider fee, it is usually not reimbursed at the end of the term.
• If you are late on payments, you may be disqualified from receiving a refund.

Frequently asked questions