Unlike home or car insurance, Disability and Critical Illness insurance are not compulsory and many people hesitate to purchase these important policies due to the cost and the possibility that they may not even end up using the coverage at all. The insurance industry is aware of this fact and has come up with a solution called a return of premium option that makes buying these policies easier both psychologically and financially.
The better quality Disability policies generally provide a return of premium option in one of two forms. The first option involves the return of 50% of your premiums on surrender of the contract as long as the contract was in force for a minimum number of years, usually 10. The calculation of the return of premium is based on just about all the premiums paid into the policy including the policy fee and the amount paid for all riders including the return of premium rider itself. Any claims made during the life of the policy are deducted prior to calculating the amount owing. If claims exceed a certain percentage, the return of premium will not be available. In this case, the client will have paid an extra premium for the chance that he may not have claimed. This can be viewed as insurance on insurance. The real benefit is realized when the client makes very few or no claims during the life of the policy. In this case, the return of premium rider is a good investment.
The second type of return of premium is fairly new in the industry and involves a return of half of the premiums paid after periods of either 7 or 8 years throughout the life of the contract. If a return of premium option is exercised, the policy continues in force as long as the client continues to pay the monthly premiums. You can either withdraw the funds in cash or you may opt to leave the funds on deposit with the insurance company who then draws from those funds to pay future premiums for the next 7 or 8 years.
Generally, the cost to add the return of premium option on a Disability policy ranges from 25-50% of the cost of the rest of the premium with the return of premium on surrender being at the lower end of the scale and the return of premium after 7/8 years being the most costly.
Critical Illness policies also offer a return of premium option in two forms. The first is a return of premium at death should the cause of death be other than a Critical Illness. The additional premium for this option is minimal, costing about half a percent of the total premium. In addition to this, you can also choose the return of premium on surrender of the contract with the stipulation that the contract must be in force for a minimum number of years, usually 10. You must specify at the time of application which return of premium option you want, and the earlier the option date, the more expensive it will be. For instance, a return of premium option that can be exercised as early as year 10 will run you about 70% of the base premium, whereas choosing the option at the expiry of the contract will cost about 45% of the base premium, depending on your age at the time of application. Although Critical Illness return of premium is quite costly, it is, in fact, a win-win situation. If in the unfortunate event you become critically ill, you will receive the full benefit, but if you don’t end up claiming on the policy, you will receive all of your premiums back. You want to make sure, however, that if you choose the return of premium option, that you fully intend to keep the contract in force until at least the first option date, otherwise, all those extra premiums will have been paid for nothing. One other thing to note is that many companies are now offering the return of premium on a scaled basis. What this means is that if you choose a return of premium option after 10 years, you will receive 50% of your premiums back in year 10, 60% in year 11, 70% in year 12 etc until the full 100% becomes available in year 15.
Although adding a return of premium option on your Disability and Critical Illness contracts can add significantly to the cost, it does provide for peace of mind that at least you will receive part or all of your money back in the event that you do not end up claiming on your policy. This cannot be said for auto or home insurance, yet, we as consumers have become accustomed to paying these premiums. So it follows that if you insure your house and your car, why would you not insure your health and future income earning potential when the out of pocket cost is 0%-50% of the actual premiums?