Life insurance policies can be complex, so it's no surprise there are quite a few misconceptions floating around about them. One interesting myth is that if you live longer than the number of years your term life insurance is good for, the insurance company will refund your premiums. This is only true if you have a certain type of policy. Here's the truth behind this misconception so you can avoid purchasing an insurance policy that may not be a good fit for your goals.
Return of Premiums Life Insurance Policies
Term life insurance is sort of like playing roulette. You're betting you're probably going to pass away within the amount of time the policy is good for (e.g. 10 or 25 years) and the insurance company is betting you won't. You're backing up your bet with your monthly premium payments, and the insurance company is backing up its bet with a payout to your family up to the policy limits. If you "lose" and end up living past the policy's expiration date, the cost of the bet are the premiums you paid all those years. Thus, the insurance company gets to keep your money and you need to decide if you want to renew your policy.
The only time you would receive your money back is if you purchase what's called a return of premiums (ROP) life insurance policy. This policy is just as it sounds. If you happen to outlive the policy, the insurance company will write you a check for all the premium payments you made on the policy. This type of policy offers the best of both worlds. Your beneficiaries receive the death benefits if you pass away while the policy is active, and you get your money back if you're still alive when the policy expires. If you want to avoid money while still enjoying coverage, this is the policy you should buy.
ROPs May Still Cost You Money
Although ROPs may seem like a dream come true, there are a couple of things you need to understand about them before you sign up for one. First, insurance companies typically charge higher premiums for these policies because there's a risk they'll have to give the money back. The larger premiums let them make more money on the interest the company earns for keeping the cash in the bank.
Second, you are essentially locked into the plan for the long haul. If you cancel the plan at any point during coverage, you'll lose the right to get your premiums back. This may not necessarily be a bad thing, particularly if you find a cheaper plan that will save you enough money to cover the amount you already paid into the previous plan.
While ROPs can be helpful in your financial planning, it's a good idea to talk to a life insurance broker, such as at Reinhardt's Insurance Agency, about all your options to ensure you're picking the right plan for you.