In recent years, return-of-premium insurance, a type of insurance product that combines protection and investment, has caught the attention of many consumers. This kind of insurance usually promises that if there are no claims during the insurance period, the insurance company will refund the premiums you've paid. Sounds like a "win-win" option, right? But from a professional perspective, the cost-effectiveness of return-of-premium insurance is actually much lower than that of traditional pure protection insurance, and its drawbacks are worth our attention.

Return-of-premium insurance includes return-of-premium accident insurance and return-of-premium critical illness insurance. If there are no claims during the contract period (like no accidents or critical illnesses), the insurance company will refund part or all of the premiums you've paid. At first glance, this insurance seems to offer both protection and financial management, which is quite appealing. But in reality, it costs more, and the protection effect isn't that great.

The main drawbacks of return-of-premium insurance:

High premiums

Compared with pure protection insurance, the premiums of return-of-premium insurance are usually higher. Take return-of-premium critical illness insurance as an example. Because it has the return function, its premium might be 2 to 3 times that of a consumption-based critical illness insurance with the same protection content, or even higher. This means consumers have to pay more for return-of-premium insurance, but the protection they finally get may not meet their actual needs.

Low returns

Another problem with return-of-premium insurance is its low rate of return. Although consumers can get back part of the premiums in the end, it usually takes decades to get the refund. By then, the refund amount is likely to be affected by inflation and its value will have dropped significantly. Also, compared with pure protection insurance, the high premiums consumers pay extra aren't used to increase protection at all. Instead, they make the return on investment of the insurance product drop sharply. If these extra costs were used for other financial products, consumers might get better returns.

Premiums are only refunded if there are no claims

Another restrictive clause of return-of-premium insurance is that the premiums will only be refunded if there are no claims during the insurance period. If there are claims during the protection period (like getting compensation for an accident or illness), the insurance contract will end early, and the return clause won't apply anymore. In other words, if unfortunately there are claims, consumers won't get the premium refund, which means the premiums they've paid won't bring any extra returns.

Limited protection content

Although return-of-premium insurance seems to offer comprehensive protection, there are actually many limitations. Many return-of-premium accident insurance and critical illness insurance promise to cover multiple risks, but when it comes to actual compensation, they only apply to the specific situations listed. For example, some return-of-premium accident insurance only covers certain types of accidents, and other unlisted accidents aren't covered. Moreover, the promise of premium refund often becomes the selling point, while the protection responsibility is weakened. As a result, consumers may not get enough protection when they actually have a claim.

The "hidden cost" of premium refund

The premiums of return-of-premium insurance are much more expensive than those of pure protection insurance. But actually, the high premiums consumers pay aren't used to provide better protection. Instead, they're for the final "refund". Although the premiums will be refunded when the insurance expires, because of the long-term high premiums, the final return on investment is often very low, and the cost-effectiveness is poor. In other words, the extra money you pay doesn't bring as good a return as you think.

The protection effect is much worse than that of pure protection insurance

The core design of return-of-premium insurance is "premium refund", not to provide strong protection. In fact, compared with pure protection insurance, the protection effect of return-of-premium insurance is much worse. Pure protection insurance usually has lower premiums but provides more comprehensive and stronger protection. If you choose return-of-premium insurance, you often get less protection and don't get the protection you should have.

The risks of return-of-premium critical illness insurance:

No premium refund after a claim

There's a key point about return-of-premium critical illness insurance: if you get a critical illness and receive compensation during the insurance period, the contract will end, and the premiums you've paid won't be refunded later. That is to say, you pay high premiums, but once there's a claim, the compensation amount you get may be similar to that of a consumption-based critical illness insurance, but you can't enjoy the subsequent premium refund. This is actually not very cost-effective for many consumers.

Poor liquidity

Although return-of-premium critical illness insurance promises to refund your premiums after decades if you don't have a claim, you usually have to wait for decades to get the money. After such a long time, the refunded premiums may have dropped significantly in value. It might even be better if you invest this extra premium in other more flexible and high-yield financial products now. In comparison, why wait so long to get your own money back? It's better to use other ways to increase your wealth now.

High premiums

Even if the protection content is similar, the premiums of return-of-premium critical illness insurance are usually 10% to 60% more expensive than those of consumption-based critical illness insurance. This means you not only have to bear higher premiums, but the improvement in protection may not be obvious. If you choose pure protection critical illness insurance, you can ensure sufficient protection while reducing expenses, and the cost-effectiveness is obviously higher.

The drawbacks of return-of-premium life insurance:

The premiums of return-of-premium life insurance are usually higher than those of traditional term life insurance, which increases the financial burden on the policyholder. Secondly, if the extra premiums are invested in other investment fields, such as stocks or funds, they may bring higher returns. However, the returns of return-of-premium life insurance are relatively fixed and there's a certain time delay. In addition, this kind of insurance has poor flexibility. If the policyholder cancels the policy early during the protection period, they usually can't get the premium refund, which means the higher premiums they've paid can't be recovered. Finally, over time, inflation may weaken the actual purchasing power of the refunded premiums, making the value of the refund lower than expected.

Return-of-premium life insurance is suitable for those who value premium refund and don't pursue high returns from other investments, especially young and healthy policyholders. They can enjoy lower premiums and hope to plan their finances in the long term, and their financial plan matches the expiration time of the policy. However, for those who pursue maximum protection at the lowest cost, traditional term life insurance may be more suitable; if you prefer to invest your money in other high-return fields or may need to withdraw the cash value during the insurance period, other types of life insurance may better meet your needs.

The essence of buying insurance is to get higher protection by paying less premiums. Return-of-premium insurance achieves the so-called "refund" by increasing premiums and sacrificing protection content. In the end, consumers bear higher costs but can't get corresponding protection.

If you focus on the core function of insurance protection, choosing pure protection insurance will be a wiser choice; if you focus more on financial returns, you can consider pure financial products instead of return-of-premium insurance. So, in the long run, return-of-premium insurance really isn't worth buying. Its high premiums, low protection, and illusory financial function make it an unworthy insurance type to invest in.

Reference:

[1]https://www.westernsouthern.com/life-insurance/return-of-premium-life-insurance