The return of premium rider removes some of the decision-risk involved with buying a disability insurance policy, because the client can get part of the premiums paid back at the end of the policy. It’s a great selling tool! However, there are some key differences in the return of premium options by carrier. 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
|
So, what’s the take away here?
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 this all seem overwhelming and make you nervous about selling disability insurance? No worries! Your very own disability expert is just a phone call away and happy to assist you in detailed quote analysis!
Contact DIS for the advice you need to protect your clients’ paychecks! And, for more technical know-how, download DI Dan’s Crash Course here.