Question

The return of premium rider is sometimes thought of as a safety net for your safety net. If the insured outlives the term policy, the insurance company returns all or some of your premium payments. All of the following are considered drawbacks of this type of rider, EXCEPT:

The lump sum benefit is considered an advantage. The insured must hold on to the policy for the full term to take advantage of the return of premium benefit and if the policy lapses, it can be terminated. Premiums can also be quite a bit higher.
The correct answer is: If the insured dies, the beneficiaries receive a lump sum death benefit.

Answer 1

The correct answer to the student's question is that if the insured dies, the beneficiaries receive a lump sum death benefit, which is not a drawback of the return of premium rider. This rider allows policyholders to get their paid premiums back if they outlive the policy term, but it does come with higher premiums and the requirement to keep the policy active for the full term to benefit from this feature.

Step-by-step explanation:

The return of premium rider in a life insurance policy is considered a drawback by some because it requires the insured to hold onto the policy for the full term to benefit from the return of premium feature, and if the policy lapses, it can be terminated. Additionally, premiums for policies with this rider are usually higher than for those without. The one aspect that is not a drawback, and thus the correct answer to the student's question, is that if the insured dies, the beneficiaries receive a lump sum death benefit, which is a standard feature of life insurance policies, including those with a return of premium rider.

This rider is different from the benefits of cash-value (whole) life insurance, which has a death benefit and can accumulate a cash value that the policyholder can use. Furthermore, the life insurance company reinvests premiums and may also offer policyholders the option to take out a loan against the policy, which they must pay back with interest.

Insurance is a method of protecting a person from financial loss, and a money-back guarantee is an implied promise from the insurance company to the policyholders under specific conditions. However, this can also create a moral hazard, where insured individuals may be less likely to guard against an event if they have insurance protection for it.