Premiums paid on a traditional insurance of any kind are not expected to be returned if no claim is filed within the policy period, including the still-popular, original term life insurance that was created just as a typical insurance and would pay a death benefit only upon the filing of a death claim during the term. But some other life insurance products developed over the years have become very innovative that they can, at the request of policy holders, return part of the premiums in a form known as cash surrender value.
Built upon term life insurance, the later-designed return of premium life insurance combines insurance with savings/investments that allows the insured at any time to surrender the insurance policy for the savings or investments that have been accumulated thus far. Two main types of permanent life insurance are whole life insurance and universal life insurance with a built-in mechanism for savings and investments respectively.
Whole Life Insurance
Whole life insurance came to exist as a result of the unhappiness from some policy holders of the original term life insurance, where they could pay premiums for 10 to 20 years and get nothing out of it at the end. To address the concern, life insurance companies started selling a policy that would cover the whole life of the insured, essentially giving everybody a death benefit at the very end. In order to have enough funds to pay for all the claims under whole life insurance (also sometimes called variable life), a savings mechanism was put in place to build up a cash reserve through extra premiums paid over the years. Because insurance premiums paid for a whole life insurance are also savings tendered, they accumulate interests and are credited to a cash account. At any time, if a policy holder decides to forgo the eventual insurance benefit, part of the premiums paid is returned as cash surrender value. But take note that the insurance company gets to keep some premiums as well, as if a term insurance had expired without a claim.
Universal Life Insurance
Universal life insurance is a further extension of whole life insurance and really incorporates investments into a insurance product to make it the universal means for meeting both the insurance needs and the investment needs. While premiums in the form of savings in a whole life insurance generate only limited earnings, charging enough premiums and then investing them through an internal mutual fund designed and managed by the life insurance company could potentially outperform beyond what is set for the death benefit and likely return a higher cash value, should the policy holder decide to cash out at some point. But conversely on the risk side, the cash surrender value or a final death benefit may also be negatively affected by any under-performance of the investments. However, even in a worst case scenario, policy holders can still expect the return of some cash value from their universal life insurance policies upon a cancellation.
It’s not surprising that as financial markets and financial products have become increasingly innovative and sophisticated, life insurance nowadays is widely used beyond just as a pure insurance product, serving both additional savings and investment needs. Any time you can get something back from the premiums paid for an insurance even when no claim is filed, that’s a good thing in life.
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