Return of Premium Life Insurance, A Guide to the Pros and Cons
Is a return of premium life insurance policy worthwhile?
Like everything in life there’s usually an upside and a downside that’s makes it hard to decide at times.
In this quick guide, our experts have compared the pros and cons of return of premium life insurance.
We've also covered the ins and outs of how a return of premium life insurance policy works to help you determine if this is the right type of coverage for your needs.
Here’s what we'll cover in this post:
Quick Article Guide
Here’s what we'll cover in this post:
What is Return of Premium Life Insurance?
Since you might not even know what this type policy is or how it works, let’s do a brief introductory overview first.
Return of Premium life insurance is also called ROP for short and many life insurers offer this policy. A ROP policy is really an insurance rider which is an add-on feature that you buy along with a term life insurance policy.
The ROP rider simply means that after the expiration of the term policy you buy, you are refunded all the money you spent over the life of the term.
Say, for example, you buy a 20 year $250,000 level term life insurance policy. Suppose you qualified for a premium of $15.00 per month.
The cost of the 20 year policy would work out to $15.00 per month x 12 months x 20 years which equals to $3,600. This is the total amount of premiums that you would pay over 20 years. Without a Return of Premium policy rider, that’s how much you would be out of pocket.
But, if your policy had a Return of Premium Rider, the insurance company would refund the entire $3,600 in premiums you paid for your policy back to you.
Does that sound too good to be true? Well, let’s look at the pros and cons and then you can decide if it would be worth your while.
Pros of a Return of Premium Policy
Life insurance carriers began offering return-of-premium riders on their term policies in the early 1990s as a solution to the "live-and-lose" dilemma presented by traditional term policies. Are Return of Premium Riders Worth It?Let’s start with the upside and positive features of having a Return of Premium policy rider.
Get Your Money Back
With a term insurance policy you have peace of mind and financial shelter your family needs as long as you have a policy. However, at the end of the term and after you’ve spent the money, it’s all out of pocket. With a Return of Premium policy, you get all the money you paid over the years returned back to you.
The Odds Favor You
To be eligible to receive the premiums back, you have to be alive at the end of the term. Statistically, the odds favor you surviving to the end of the term.
This is especially true if you are young and healthy when you first purchase this type of policy. If that wasn’t the case, term life insurance would be a lot more expensive.
Unlike other regular term polices, where you are left in the red at the end of the term, with a Return of Premium policy you get a lump sum payment of cash that you may use as you please.
The other good thing about a Return of Premium Policy is the lump sum is not taxable, because it was used for life insurance, so you can spend or invest the money anyway you choose.
Cons of a Return of Premium Policy
You may be asking – “What’s the catch?” I wouldn’t exactly call it that...but there are a few things that may be considered cons for this type of term life insurance rider.
Return of Premium Costs More
One of the drawbacks about a Return of Premium Policy is that you can expect to pay more for your life insurance policy. However, it’s actually not as expensive as you may think, for most people a ROP policy will only cost a few extra dollars more per month.
If we look at the example above where you might have been paying $15.00 per month for a 20 year term policy, you might end up paying about $20.00 per month for a Return of Premium rider.
Instead of the 20 year policy costing you $3,600 over 20 years, it would now cost you $4,800. But, if you outlive your policy, that money will be returned to you.
Must Survive to the End of the Term
With a Return of Premium policy, you must outlive your term to collect the money you have paid for your policy. If you die before your insurance policy ends, your beneficiaries would receive the death benefits, but not the premiums you paid up to that point.
Must Keep the Policy in Force
Another thing to keep in mind is that if you buy a 20 year term policy, you have to keep the insurance policy active for the entire 20 years.
If you let the policy lapse before the end, you do not get any of your premium money returned to you. So, it basically boils down to the simple fact that “it’s an all or nothing policy.”
Another thing you should be aware of is that you do not get any interest on the money when it’s returned. If you’ve paid $4,000 in premiums over 20 years, that’s what you will get back and not a cent more.
Where to Find a Return of Premium Life Insurance Policy?
You always want to talk to an independent agent like myself. Our agency represents 63 top-life insurance providers which allows me to shop the market on your behalf, saving you time and money.
If you have health concerns, don’t let that dissuade you, because we can give you valuable advice to help you find a policy that is tailored to your needs. Whatever your needs or questions then please call me direct at 855–247–9555.
Managing Partner and Co-founder
Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.