How Does Return Of Premium Term Life Insurance Work?
Return of premium term life insurance, often cited as “ROP” or “life insurance with a return of premium rider”, gives you back all your money if you outlive the policy. It’s term life insurance, so you choose how long it lasts, which is typically 10, 20, or 30 years.
You’ll pay level premiums for the duration of the policy, and if you’re alive at the end, the insurance company will give you one of two options:
- Refund of premiums: You’ll get a check equal to the sum of all the premiums you’ve paid throughout the years. For example, if you paid $50 per month for 20 years, at the end of the policy you would receive a check for $12,000 (50 x 12 x 20).
- Reduced paid-up life insurance: This would give you a paid-up life insurance policyPaid-up life insurance
A life insurance policy in a status where no additional premiums are required, and the coverage will stay in force indefinitely. that lasts forever and requires no further premium payments. The death benefit offered will be greater than the sum of all the premiums you’ve paid.
This is starkly different from standard term life insurance, which simply terminates at the end of the policy (unless you convert or renew it).
Term life insurance with a return of premium rider often builds cash value, as whole life insurance policies do. That means you can borrow from the cash value while the policy is still in force and spend the money however you wish.
Should you die while the policy is active, the insurer will pay out the death benefit as a tax-free check to your beneficiaries. They would be free to use the payout money however they wish, for funeral costs, bills, debts, or anything else.
Pros And Cons Of Return Of Premiums Term Life Insurance
- Refund of money: Getting all your money back at the end of the term is a unique benefit exclusive to return of premium term insurance.
- Option for permanent paid-up life insurance: Instead of getting your money refunded, you can opt for the paid-up life insurance option, which would yield a permanent death benefit that is actually greater than the amount of cash you’d receive.
- Can build cash value: Some providers allow for cash value accumulation, which you can borrow from. This can be helpful if you ever find yourself in a financial bind, needing cash and have no other source to go to. You could borrow against the policy’s cash value.
- No loss if you outlive the policy: One of the main critiques people have with term insurance is that they feel it’s a waste of money since the policy ends, and the insurer keeps the money you pay. Well, with return of premium life insurance, this is a non-issue, since you do get your money back. There is no risk of loss or “wasting” your money, as some people would assert.
- Much higher cost: Return of premium term life insurance rates are much higher than standard term life insurance. For example, a $100,000 20-year standard term life policy will cost roughly $15 monthly for a 40-year-old male who does not use tobacco. That same person would instead pay about $44 per month for the same policy with a return of premium rider. That’s nearly 300% more expensive than non-return-of-premium coverage.
- You’d have a better return buying a level term and investing the difference: If you were to buy a level term (which costs significantly less) and take the money you’re saving (compared to cost of a return of premium term) and invest that cash, you will have more money in your investment account at the end of the term than would you have if you just got your money back. For example, let’s say a 20-year level term costs you $50 monthly. That term with a return-of-premium rider will cost about $150 per month. If you take $100 (that’s how much you save) and put it in an investment product every month, you’ll have about $46,000 (Use an investment calculator and assume a modest return rate of 6%). In contrast, the return of premium term will only refund you $36,000 (150 x 12 x 20).
- Few companies offer these policies: Return of premium life insurance is hard to find simply because level term is so much more desirable. For example, Mutual of Omaha used to offer a 30-year term with an ROP rider. However, they discontinued it due to a lack of consumer interest.
- If you cancel the policy or let it lapse, you lose everything: The return of premium feature only applies to those who keep the policy active and in good standing (regarding payments) until the end of the term. If you cancel it at any point, the insurer keeps all the money. If you miss a payment and don’t make it up within the grace period, the policy lapses, and the insurer keeps your money.
Cost Of Return Of Premium Life Insurance Compared To Non Return Of Premium Coverage
Return of premium term life insurance, on average, costs 200-300% more than non-return of premium term insurance. Below are sample prices for ROP term and level term life insurance.
Is A Return Of Premium Term Life Policy Worth Buying?
On the surface, the prospect of getting your money back at the end of the term (rather than the company keeping it) sounds like a no-brainer. However, it’s generally not worth it because this benefit comes at a cost of premiums that are approximately 200-300% higher.
Instead of buying an ROP term policy, it would be more beneficial to spend the same premium and get significantly more coverage. For example, a 50-year-old male will pay about $109 per month for $100,000 in ROP term coverage. In contrast, he would get over $500,000 in coverage for a non-ROP term policy.
If you’re interested in building up a nest egg, a superior option would be to save your money by buying a non-return-of-premium life insurance policy. Then take the money you’re saving and put it into an S&P 500 index fund. After 20 or 30 years, you’ll have far more money in your investment account than you would get back from the return of premium feature.
Ultimately, some people still feel an ROP life insurance policy is worthwhile because:
- They want to leave a gift for their family.
- Don’t want to “waste” their money on a life insurance policy that expires, leaving them with nothing.
- Want supplemental life insurance through retirement (assuming you opt for the paid-up life insurance option versus getting cash back).
At the end of the day, weigh the pros and cons and decide for yourself what makes sense for your family, needs, and budget.
Frequently Asked Questions
No, the money you’d get back at the end of a return of premium term life policy is not taxable since there is no gain of any kind. It’s simply a 100% refund, which the IRS does not consider income.
Return of premium life insurance is always a term life policy. Both whole life and universal life policies are types of permanent coverage. There is no point at which they would end, or you would outlive it, and for that reason, a return of premium rider would be nonsensical.
Return of premium life rider generally must be chosen at the time you initially apply or added on within the first 30-60 days of the policy being issued. Insurance companies will not simply allow you to add on this type of rider (or any rider for that matter) any time you want.
- Nationally licensed life insurance agent with over 16 years of experience.
- Personal annual production that puts him in the top .001% out of all life insurance agents in the nation.
Anthony Martin is a nationally licensed insurance expert with over 16 years of experience and has personally served over 10,000 clients with their life insurance needs. He frequently authors entrepreneurial and life insurance content for Forbes, Inc.com, Newsweek, Kiplinger, and Entreprenuer.com. Anthony has been consulted as an expert life insurance source for dozens of high-profile websites such as Forbes, Bankrate, Reuters, Fox Business, CNBC, Investopedia, Insurance.com, Yahoo Finance, and many more.
- Nationally licensed life insurance agent with over 20 years of experience
- Best selling Amazon author.
Jeff Root is a nationally licensed life insurance expert with over 20 years of experience. He has personally helped over 3000 clients with their life insurance needs. Jeff is a best-selling Amazon author and the managing partner of a highly successful insurance brokerage that manages over 2,500 licensed insurance agents across the USA. He has been a featured life insurance source for prestigious websites such as Forbes, Bloomberg, MarketWatch, Nerdwallet, and many more.
- Nationally licensed life insurance agent with over 15 years of experience
- Best selling Amazon author of five insurance sales books.
David Duford is a nationally licensed insurance expert with over 15 years of experience. He has personally helped more than 15,000 clients buy life insurance. David has been featured as an expert source for highly authoritative publications such as A.M. Best and Insurancenewsnet. He also runs one of the largest Youtube channels to help aspiring insurance agents serve their clients better.
- Nationally licensed life insurance agent with over 20 years of experience
- Best selling Amazon author.
Jeff Root is a nationally licensed life insurance expert with over 20 years of experience. He has personally helped over 3000 clients with their life insurance needs. Jeff is a best-selling Amazon author and the managing partner of a highly successful insurance brokerage that manages over 2,500 licensed insurance agents across the USA. He has been a featured life insurance source for prestigious websites such as Forbes, Bloomberg, MarketWatch, Nerdwallet, and many more.
- Nationally licensed life insurance agent with over 15 years of experience
- Best selling Amazon author of five insurance sales books.
David Duford is a nationally licensed insurance expert with over 15 years of experience. He has personally helped more than 15,000 clients buy life insurance. David has been featured as an expert source for highly authoritative publications such as A.M. Best and Insurancenewsnet. He also runs one of the largest Youtube channels to help aspiring insurance agents serve their clients better.
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investment calculator. https://www.nerdwallet.com/investing/calculators/investment-calculator
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S&P 500 index fund. https://www.bankrate.com/investing/best-index-funds/
