Whole life insurance is one of the mainstays of the life insurance world, while return of premium is a relatively new concept to the scene. Whole life insurance is in reality part life insurance and part investment vehicle. Return of premium life insurance is much like standard term life insurance in many aspects except for one major difference: Your premiums are returned should you outlive the length of your policy.
Time Frame
Whole life insurance policies are designed to last a person's entire lifetime, while return of premium life insurance plans are for a designated time period only. Return of premium policies are typically sold for time frames of 15, 20 or 30 years.
Identification
Whole life insurance is a combination life insurance policy and investment plan. A portion of your premiums are put into an investment account and the money will accumulate over time so that your insurance policy has a real cash value. That money can be borrowed against or collected should you wish to surrender your whole life policy. A return of premium life insurance policy does not accumulate any earnings. If you are alive when the length of your return of premium policy ends, you receive your premiums back.
Significance
Both policies will be more expensive than a traditional term life policy. Whole life insurance costs more than term life, as a portion of your premium payment goes to the investment aspect of your policy. Return of premium life insurance is typically between 25 and 50 percent more than a standard term life insurance policy for the same face value.
Considerations
One key difference between whole life insurance and return of premium life insurance is the amount of money you receive should you cancel your policy early. As whole life is designed to be lifetime insurance, canceling a policy early would simply be the act of surrendering your policy for its cash value. You would get a good deal of your premiums back, depending on how long you help the policy. With return of premium insurance if you terminate your policy early, you may get a small portion of your premiums back, although it will typically be less than one-third of the amount of premiums paid, depending on how long you kept the policy intact.
Features
Both types of insurance plans will allow for the accumulation of cash without any tax liability. With a return of premium policy, you will not be taxed should your premiums be returned, as you are simply getting back the money you paid into the insurance plan. With a whole life policy, you will not be taxed on the interest made from the investment portion of your premiums as per Internal Revenue Service regulations. Dividends paid on a participating whole life insurance policy will not be taxable as long as the amount you receive is not greater than the amount of the premiums you paid. Even if you surrender your policy for its cash value, the money you receive will not be subject to taxation as long as it is not greater than your paid premiums.
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