Our editorial team reviewed the Financial Consumer Agency of Canada’s life-insurance guide, FCAC’s insurance-purchase guide, CLHIA’s consumer guides (including its critical-illness guide), and CLHIA’s 10-day rescission guideline.
This helped us learn what types of insurance may be offered with return of premium in Canada, what triggers a return of premium, how to compare policies with return-of-premium features, and other considerations. The CLHIA rescission guidelines helped us to confirm the initial time frame for cancellation.
How Return Of Premium Works
There is not one definition of return of premium in Canadian life and health insurance. A term-life policy may include a return-of-premium rider, with its own terms. Generally speaking, when you outlive your term or cancel a term-life policy, you don’t get your money back. According to the Financial Consumer Agency of Canada (FCAC), term-life insurance does not provide cash value and expires without any money being paid out.
Some individual critical-illness policies return premiums when a policy expires, is cancelled, or the policyholder dies. This may be an option or part of the original policy. Critical-illness insurance pays out a lump-sum benefit when certain policy and diagnostic conditions are met. Remember, a critical-illness illustration doesn’t mean it applies to a term-life policy.
| Contract or payment | What it normally means | Who receives money |
|---|---|---|
| Ordinary term life | Has no cash value. Pays a death benefit if insured dies during the term of the policy. | The death benefit will be paid to the named beneficiary. |
| Term life with a specific ROP rider | Refund given under a policy if specified maturity/survivorship criteria are met. Depends on the policy. | As stated in the rider. Usually, this will be the policy owner. |
| Critical illness with ROP | A refund may be payable following death, expiry, or cancellation, depending on the policy. | Depending on the particular option and province, payment is made to the owner, his/her estate, or the person you have designated. |
| Permanent life cash value | A value within some whole or universal life contracts. | Not ROP; the owner’s access is governed by the contract. |
When Can A Return Of Premium Benefit Be Paid?
- Return on death: This benefit may be paid when coverage has not lapsed at the insured’s death. Read the policy to confirm the benefit is paid. Policies with return of premium do not necessarily provide a life insurance benefit plus an additional premium refund.
- Return on expiry: This benefit may be paid when the term ends. Policy conditions must be met for it to be payable. The owner receives the return.
- Return on cancellation or surrender: This benefit may vest over time. Cancelling the policy before it has vested means nothing will be paid. Surrendering it later may result in a specific percentage being paid.
- Return during the free-look period: Individual policies can be returned during the policy’s review period. FCAC and CLHIA describe this review period. It is commonly 10 days.
Read the benefit trigger and calculation clauses to see which premiums, fees, surcharges and other charges are included in the return-of-premium amount.
Which Premiums Can Be Returned?
Not necessarily 100% of the premiums that you paid. Read the policy for a definition of what premiums are refundable. Keep in mind vesting percentages and claim offsets.
Remember that return of premium is a refund of premiums, not investment returns. Refunded premiums carry an opportunity cost, as the difference may have been invested, and inflation erodes the purchasing power of nominal dollars.
How Much Extra Can An ROP Rider Cost?
Unfortunately, there’s no Canada-wide, broadly defensible multiplier. It depends on the product, the amount of coverage, your age and health, the term, what event(s) would trigger ROP and the vesting schedule. Your best bet is to ask an insurer for a couple of policy illustrations for the same coverage: one with ROP and one without.
Is An ROP Benefit The Same As A Premium Refund?
No. Return of premium is a benefit or policy feature. Return premium is generally a billing adjustment that may refund unearned or excess premium due to a policy change, cancellation, correction, etc. Neither is the cash value of permanent life insurance.
Read More: Review Other Benefits Available Through Life Insurance
Potential Benefits Of Return Of Premium
Some buyers may be reluctant to pay for insurance that may never pay out. The option of receiving a predetermined payment after being continuously insured for the full term of the policy may appeal to buyers who would not otherwise purchase the product.
Certain critical illness policies may be written to pay upon death, critical illness, or at maturity. These provisions can motivate buyers to continue paying for coverage.
Potential Drawbacks Of Return Of Premium
- Return-of-premium policies may cost more than policies without return-of-premium coverage
- The amount you get back probably won’t be subject to investment growth
- If the policy lapses early in its term, you may receive little or none of your premiums back despite paying for years of coverage
- Depending on the policy, premiums returned to you may be reduced or eliminated if a claim has been paid.
Is Return Of Premium Worth The Extra Cost?
| Ask for this | Why it changes the decision |
|---|---|
| Exact product and rider name | Confirms that you are comparing term life, critical illness or another benefit |
| Premium with and without ROP | Shows the actual cost of the refund feature |
| Eligible-premium definition | Shows which payments may be returned |
| Vesting schedule | Shows the effect of cancelling early |
| Claim-offset wording | Shows whether a full or partial claim affects the refund |
| Payee at death, expiry and cancellation | Shows who receives payment in each situation |
CAUTION: Never cancel your current insurance until your replacement is issued, received, and checked. Replacement can have consequences including restarting of the suicide clause, contestability clause and possible new evidence of insurability requirements.
Get written advice about replacement from a licensed agent. Get professional advice about the tax treatment of the return of premiums if that issue is important to you. Ask for and receive the specific ROP rider, refund schedule and policy.
Read More: Compare Term and Whole Life Insurance