Return of Premium on Critical Illness Insurance: When It Helps and When It Hurts

I recently came across a situation that perfectly highlights how confusing Critical Illness (CI) insurance can be, especially when Return of Premium (ROP) is involved.

Someone was advised to cancel an existing CI policy, take a sizeable ROP payout, and then repurchase what was described as an “identical” policy at a significantly higher monthly cost. On the surface, the advice sounded appealing. After all, getting a large cheque back feels like a win.

But once you slow the conversation down and look at the planning and the math, these situations often deserve a much closer look.

Why This Advice Can Sound Appealing

Return of Premium is psychologically powerful. Being told you can “get your money back” resonates with a very human fear: paying for insurance you may never use.

Advisors know this. It is easy to frame ROP as a refund or even a benefit, rather than what it actually is: the return of premiums you have already paid, usually in exchange for significantly higher ongoing costs.

Without proper context, it can feel like you are being offered a smart financial move when, in reality, you may simply be reshuffling money at a much higher long-term cost.

The Math Problem Most People Don’t See

In many replacement scenarios, the issue becomes obvious very quickly.

If you cancel a CI policy with relatively low premiums and replace it with the same amount of coverage at four times the cost, the “refund” is often consumed by the higher premiums in just a few years. After that break-even point, you are permanently worse off from a cash flow perspective.

Unless there is a clearly defined exit strategy or a material improvement in coverage, this type of replacement rarely improves the client’s position.

What Often Gets Overlooked

There are several important details that are frequently missed in these conversations:

1. Older policies can be better than newer ones
   CI definitions and exclusions change over time. Newer does not automatically mean better. In some cases, older contracts provide stronger or clearer definitions for certain conditions.

2. Contestability resets
   Replacing a policy resets the contestability period. If a critical illness occurs within the first two years of a new policy, the insurer has the right to fully review the original application and medical history. This can complicate or jeopardize a claim.

3. ROP timing is not always what people think
   With Term CI, Return of Premium does not always pay out at the end of the term. Many contracts only refund premiums at the end of the entire policy duration, often age 75, after all renewals. Cancelling at the end of a term does not always trigger a payout.

In many cases, ROP value is preserved only if the policy is converted to a permanent CI policy, not surrendered.

Because of this, it is critical to confirm ROP terms directly with the life insurance carrier, in writing, rather than relying solely on verbal explanations.

How Return of Premium Should Actually Be Evaluated

Return of Premium should never be evaluated emotionally. It should be evaluated mathematically.

The simplest way to think about it is this:

• The difference in cost between a CI policy with ROP and one without ROP is effectively the “price” of the ROP feature.
• You can calculate the internal rate of return (IRR) on that extra cost and compare it to what you could reasonably earn by investing the difference yourself.

It is also important to understand the trade-off:

• If you never claim, ROP may pay out in the future.
• If you do claim, you typically receive the CI benefit but lose the ROP entirely.

In other words, ROP only pays off if you are healthy enough not to need the insurance.

The Role of Commission and Replacements

Cancelling and reissuing a policy does generate new commission for the advisor. That does not automatically mean the advice is wrong, but it does create a conflict of interest that must be addressed transparently.

In Canada, advisors are generally expected to demonstrate that a replacement is clearly in the client’s best interest. That means showing, in writing, why the new policy improves the client’s position overall, not just why it feels attractive in the moment.

Questions You Should Always Ask

Before cancelling or replacing a CI policy, you should insist on clear answers to the following:

• Can you provide the recommendation and rationale in writing?
• Can I see a side-by-side comparison of my existing policy versus the new one?
• What happens to my ROP if I cancel today, confirmed by the carrier?
• How long does it take for the higher premiums to eliminate the ROP benefit?
• Who benefits financially from this replacement?

If the explanation still does not make sense after that, a second opinion from an independent, licensed advisor is not just reasonable, it is prudent.

ALSO READ: When Return of Premium Actually Makes Sense 

Final Thought

Critical Illness insurance is a risk management tool, not an investment. Return of Premium is not free money. In some situations, it can make sense. In many others, it adds cost, complexity, and false comfort.

Good advice should reduce risk and increase clarity, not create new questions after the fact. If you are ever unsure, slow the process down. A thoughtful review today can prevent a very expensive mistake tomorrow.

– Jeff

*Disclaimer: This article is intended for general informational and educational purposes only and does not constitute personalized insurance, financial, legal, or tax advice. Insurance needs, policy features, costs, and suitability vary based on individual circumstances and specific contract provisions. Coverage availability and terms are subject to insurer underwriting and approval. Readers should review their own situation carefully and consult with a licensed insurance advisor before making any insurance decisions or changes to existing coverage.