What happens if you buy disability insurance but never have a claim? Well, you should probably consider yourself lucky. Disability is common, and if you never have to file a claim, you’ve been lucky enough to avoid illnesses or injuries that prevent you from working. But what about all the premiums you’ve paid? That money is probably gone – unless you have a disability insurance return of premium rider.
How Does the Return of Premium Rider Work?
With most insurance products, you can’t get your premiums back just because you never used your coverage. You don’t get an auto insurance refund for avoiding crashes, and you don’t get a homeowners insurance refund for avoiding natural disasters. However, disability insurance sometimes comes with a return of premium rider that provides a refund. It’s not in all policies, and it’s not a good fit for all clients, but it can be an attractive option for some policyholders.
The details of this rider vary significantly from carrier to carrier. In general, however, the return of rider premium allows people to get a percent of their insurance premiums refunded after a set period of time.
- The percent of premium returned typically varies from 50 percent to as high as 100 percent.
- The refund could occur repeatedly, like every five years. Alternatively, it could happen once when a qualifying event occurs, like when the insured turns 67.
In each case, you can expect that any benefits paid will be subtracted from the return. It’s important to read the details carefully so you understand exactly how your rider works.
What’s the Appeal?
It’s pretty easy to see how this rider could appeal to many people. Disability insurance is important, but no one likes paying for it. Furthermore, although the odds of disability are high, many people assume that they personally will never be forced to stop working due to disability. For anyone who worries that they’ll never use their insurance policy, the promise of a premium return is very attractive.
Is There a Downside?
Nothing in life is free, and that includes this option. Adding a return of premium rider to a disability insurance policy will increase the premium cost. In other words, your clients will have to pay more now to qualify for a return later.
We’re not talking about chump change, either. A return of premium rider can easily add hundreds of dollars to the annual premium. Some riders may almost double the cost of insurance. If a client is already price sensitive, this extra premium could turn a “maybe” into a “no.” The extra cost could also increase the risk of the client deciding to cancel the policy. Even if the client can afford the extra cost, instead of paying more for a return of premium rider, he or she may prefer to invest that money.
How Does the Math Work Out?
To determine whether a rider is worthwhile, it’s helpful to calculate the cost of the rider and compare this to the potential return.
Consider the following scenario:
Your client, a 50-year-old manufacturer’s representative, has no disability coverage and is unsure of the need. The last thing he wants to do is pay out more of his income for another insurance product that he may never use! He seems like a great candidate for a policy with the return of premium rider. In the DI illustrations, there are several carriers shown that offer a return of premium option. How do you know which option would be the best for this client?
Let’s take a look at the different options. The plan you are proposing to this client is non-cancelable with the following features:
- $5,000/mo of benefit for a five-year benefit period
- 90-day waiting period, a 5-yr benefit period with a residual disability provision and return of premium rider
- Please note that all scenarios assume no claims and keeping the policy in force until age 65.
How the return of premium rider varies between three carriers:
| Cancel After 15 Yrs | Carrier 1 | Carrier 2 | Carrier 3 |
| How return of premium works according to carrier’s policy terms | Returns 50% of paid premiums every five years minus any claims. | Percent returned varies depending on how long policy is in force. Refund is for a % of paid premium minus any claims. The longer the policy is in force, the more they will refund. | Returns 100% of paid premium, minus any claims, assuming the policy is kept in force until age 67. If the policy is surrendered before age 67, a % of the paid premium will be refunded depending on the number of years the policy was in force.
|
| Premium paid | $4,129.30 x 15 years= $61,939.50 total paid premium | $3,452.62 x 15 years= $51,789.30 total paid premium
|
$5,004.00 x 15 years= $75,060 total paid premium |
| Amount of premium returned upon cancellation in 15 years | $30,969.75
$61,939.50 x 50%= $30,969.75 premium returned
|
$25,895.00
Per product illustration for years the policy is in force.
|
$75,060.00
100% of paid premium |
| Actual policy cost per year:
($ paid – $ returned) divided by years policy is in force |
$2,064.65
$30,969.75 remaining premium/15 years= $2,064.65 actual policy cost per year, assuming no claims
|
$1,726.29
$25,894.30 remaining premium/15 years= $1,726.29 actual policy cost per year assuming no claims
|
$0 |
In the comparison above, Carrier #3 is looking like a great option for this client at the 15-year cancellation mark! But how do those numbers change if the client decides to cancel his policy after 5 years? Take a look at the numbers below and you’ll see that with this added information, suddenly Carrier #1 is more appealing!
| Cancel After 5 Yrs | Carrier 1 | Carrier 2 | Carrier 3 |
| Premium paid | $4,129.30 x 5 years= $20,646.50 total paid premium | $3,452.62 x 5 years= $17,263.10 | $5,004.00 x 5 years= $25,020 total paid premium |
| Amount of premium returned upon cancellation in 5 years | $10,323.25
$20,646.50 x 50%= $10,323.25 premium returned
|
$1,554
Per product illustration for years the policy is in force.
|
$550.44
$5,004 x 11% (% given to 50 year old after 5 yrs.) |
| Actual policy cost per year:
($ paid – $ returned) divided by years policy is in force |
$2,064.65
$10,323.50 remaining premium/5 years= $2,064.65 actual policy cost per year assuming no claims
|
$3,141.82
$15,709.10 remaining premium/5 years= $3,141.82 actual policy cost per year assuming no claims
|
$4,893.91
$24,469/5 years = $4,893.91 actual policy cost per year assuming no claims
|
The return of premium is a nice option and can be very helpful in selling coverage to certain types of clients. However, the benefits can vary widely, depending on how long the policy is kept in force, age of the client when policy is applied for, and if the client suffers a disability. It’s very difficult, at time of application, to know which carrier would end up returning the most premium to the client. I would always consider a carrier based on the definition of disability and residual definition before looking at the return of premium rider details. These are generalizations, meant to illustrate the importance of contract language so please check the specific product language of the carrier you are selling.
Does It Make Sense for Your Clients?
There are many issues to consider when determining whether a return of premium rider makes sense for your client:
- How much more will the premium be?
- Can the client afford the additional premium cost?
- Would the client be able to invest the difference in a more lucrative manner?
How much will a return of premium rider cost your clients? Request a quote. Also, if your clients are price sensitive, make sure they know that having some disability insurance protection is better than having no protection at all. Use our Income Protection Options Worksheet to help them find a plan that works for their budget!