Is a Disability Insurance Refund of Premium rider good value?

Over the years we have helped clients structure their disability and business expense insurance to make it more cost effective. 

Some look at individually owned Disability insurance policies as “expensive” arguing that if they don’t ever make a claim it is “money down the drain”.  “I could have invested that money and been better off”. 

Putting aside the basic transfer of risk / immediate liquidity benefit of most insurance solutions, how does the insurance industry encourage people to reduce their disability claims experiences? It does it by offering a Refund of Premium option if no claim is made.

In the early 1990s some companies started to offer a Premium Refund Rider that offered a return of up to 75% of the entire premium paid (not just the premium for the rider) over a period as short as 8 years. Over time, for later issued policies, this was reduced to 50% of the entire premium paid. 

What are the factors to consider when considering  the rider?

        Cash flow. Is the increased cost of the Refund of Premium rider manageable?

         Will the policy be personally or corporately owned? 

         Are there any tax consequences if, as owner, a corporation receives a refund?

         Does the Premium Refund Rider represent good value?

         Can the insurer change the percentage refund of the rider?

         Are there contractual reasons a refund will not be paid out? 

         Can a claim be made and still get a refund? 

Under the terms of a long time client’s disability policy (issued in the mid 1990s) the client recently received a $19,000 tax free refund. When we calculated the real cost of the policy (total premiums paid over the period less the refunds) the net cost is very low. The client looked at it as a forced savings plan. 

Did the additional cost of the rider represent a good “investment”? To generate the same result an investment would have to have generated an after tax return of about 14%.

For a similar policy issued today the investment value of the refund rider can represent about an 8% after tax return. An equity like return with the risk profile of a high quality bond.

In the event of a Health Incident a well structured disability plan offers excellent value when having to replace income because of illness or accident. It is peace of mind to pay the bills.

Adding the Premium Refund Rider can offer excellent value if a claim is not made.

Whether it is to fund Income Replacement, Office Expense protection, Buy Sell / Partnership Agreements or Key Person insurance our extensive experience has helped many clients structure their Disability Policies cost effectively