We will discuss here on what type of insurance would be used for a return of premium rider and offers a refund for the premiums paid on a term life insurance policy when the policyholder does not die within a specified period of time after the expiration of the term. A “double-refund” rider provides for two refunds: One upon the death of the policyholder and one at the expiration of the policy’s term. The premiums are refunded to the policyholder because it is assumed he did not intend to take advantage of the insurance feature that provides for a refund. In other words, it is assumed he purchased the insurance for the cash value and intended to keep the policy for its full term.
Take the case of a wife who purchases a $100,000 life insurance policy for her husband. She wants to make sure he won’t be able to get rid of the policy without her being able to get the full benefit of it. Therefore, she wants to buy a “double-refund” rider. It may cost her an extra $3 or $6 per month but that will make sure her husband can’t do anything to screw her over. What if the policyholder has already died when you add the rider? Is there any penalty for adding the rider after the fact? Yes, there is.
Certainly 2 or 3 percent but, in most cases, none at all. There’s no penalty for making the change even after the first refund is due. This means she’ll receive a double-refund, even though her husband is deceased! How about adding a “spousal surrender” rider? That’s a rider which allows the surviving spouse to cancel the policy within 60 days of the date of the first premium payment. Sounds reasonable, doesn’t it? Actually, it’s sort of stupid. If you read the fine print in almost any group insurance policy, you will find something like this:
Conditions for successful return of premium
(continued) cancellation of this insurance by you or your dependent spouse (if any) within 60 days of the date of the first premium payment shall not result in a loss of premium if you or your dependent spouse (if any) are alive at the end of such 60-day period. End if you or your dependent spouse (if any) are alive at the end of such 60-day period. Ditto for a surviving spouse. What this means is, if you add a “spousal surrender” rider to a group policy which is already in effect when your spouse dies, it will have no effect whatsoever. It will be as though you had never added it.
First, the “spousal surrender” rider will be ignored and, second, the double-refund rider will become due and owing even though the original rider was never activated. Why does this happen? Because when your spouse dies, the new owner of the insurance policy will, by default, be the spouse mentioned in the “conditions for successful return of premium.” In other words, it will be treated as though you had never made any change to the policy. Let’s go back to our fictitious Mrs. Jones. She pays her $6 per month for the “double-refund” rider. Her first payment is due the first day of the first month following the date her husband died.
What types of insurance that offer return of premium?
For example: If you own a car and you keep driving it even after its engine has broken down, eventually you are going to have to pay to have the car repaired. However, if you have car insurance, the repair bill will be covered by your insurer. This is known as “repair coverage.” The same concept applies to insurance. If your life gets so screwed up the insurer is going to have to make some sort of a major reconstruction effort, the premiums you have paid will be returned to you “repaired” or “restored” to their original status. This protects you against what’s known as an “ULIP” or Unearned Insurance Payment. It can also protect you against what’s known as a “Loss of Premium.” In simple English, this means the insurer will reinstate your original policy and, if you have made any changes, will apply those changes against the current owner of the policy.
Nevertheless, it will be as though those changes had never been made. The Law of Unintended Consequences! As always, unintended consequences are the bane of the human mind. Let’s see if we can’t find a few more. What if your insurer says they don’t have to pay out because your death was not expected? How about “expectation of death”? Let’s say your health is poor and you know that, in the next year or two, you are going to die of cancer. Does this mean you can get away with not paying your premiums? No way. Expectation of death is not the same thing as actual, honest-to-God expectation. If you do die before your next premium is due, guess what? Your heirs will still have to pay the “loss of premium” which means, if they have to, they will cancel the policy and start all over again with a new owner.
Working of life insurance and return of premium insurances
Let’s see if we can’t come up with a few more examples. What if you have whole life insurance and you never change the beneficiary? Eventually, the person whom you have designated to receive the benefits will be entitled to those benefits whether you are alive or not. In other words, if you are dead, that beneficiary is going to receive your $20,000 in death benefits. This will result in an ULIP. An Unearned Insurance Payment. How about an “annuitant” who never changes the amount of his or her contribution? Same thing. An ULIP. Same thing. What if you die right before your next premium is due? In this case, your heirs (if you have any) will still be responsible for the “loss of premium.” This could put a real crimp in their finances. One more.
Benefits of return of premium rider insurance
As I said earlier, when you pay extra for a return of premium rider, it will, by default, be the spouse mentioned in the “conditions for successful return of premium.” However, this does not mean your heir will automatically receive the death benefits from the insurance company. The terms and conditions of the policy control. Let’s say your beloved Mrs. Jones has paid the extra $6 per month for the “double-refund” rider. She has paid it every month since her husband’s death. But, let’s say you die first. Then, it will be up to her to prove her claim. After she pays the necessary premium to reinstate the policy, the insurance company will review her claim and, if it is acceptable, will send her the check for $20,000. If not, forget it. No payment. How to buy a return of premium rider?