What is return of premium life insurance?
Return of premium life insurance returns some or all your premium payments to you if you outlive your policy's term. This added rider option will allow you to get your money back at the end of the term and provide security that your premium dollars are not "wasted" if you outlive your policy. To use this feature, you must add a return of premium (ROP) rider to your term life insurance policy. An ROP rider can make your policy more expensive, but without one you won't receive any benefit if you're alive when your policy expires.
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How does a return of premium life insurance rider work?
When you purchase a term life insurance policy, you select the length of time you want the policy to remain active. Many insurers offer term life policies that last 10, 20, and 30 years. You can typically add an ROP life insurance rider before or after your policy is issued, though insurers may require additional underwriting if you add an ROP rider more than a few years after buying your policy.
If you're still living when the policy term ends, the insurance company pays back all or some of the money you spent on payments, depending on your policy, in the form of an ROP benefit. If you die during the policy term, your beneficiaries can claim the death benefit, just like with any other life insurance policy.
Example:You purchase a 30-year term life insurance policy with a return of premium rider, and your monthly payment eligible for the ROP benefit is $50. If you're still living when the term ends and you haven't missed any payments, you may get $18,000 back from your insurer ($50 x 360 monthly payments = $18,000).
What are the benefits of return of premium life insurance?
The main benefit of an ROP rider is that you get back some or all your premium payments when your policy expires. With a standard term life policy, your coverage ends without any benefit paid to you or your beneficiaries.
Additionally, the money back from your term life insurance may not be taxable, unless there's a gain; consult with a financial advisor to determine any tax obligations. The refund might not include fees and other riders you have on the policy, and missing premium payments can disqualify you from getting your ROP benefit.
Pro tip:
ROP riders are only available with term life insurance. Permanent life insurance policies, such as whole life and universal life, instead feature a cash value component that grows in value over time. If the policy's cash value grows to equal the death benefit, the insurer will cancel the policy and pay out the cash value to the policyholder.
Who should consider a return of premium rider?
A return of premium life insurance rider may appeal to risk-averse people who want a guaranteed return of their premiums. Depending on when your policy expires, you could use the ROP rider benefit to:
- Supplement your retirement funds
- Pay off outstanding debt
- Leave a nest egg for your family
If you're considering life insurance with an ROP rider, speak with a financial advisor about the potential trade-offs and tax implications for your situation.
Canceling a term life policy with ROP
In the event you decide to cancel your policy prior to the policy term ending, you won't get refunded for premiums paid. The key requirement of ROP is to pay premium through the life of the policy.
Is return of premium life insurance worth it?
It depends on what kind of coverage you're looking for in a term life policy. If you're primarily concerned with getting coverage at an affordable premium, then a standard term life policy is more suitable. If you can afford the higher premiums of an ROP term life policy, and want a guaranteed return of your premium dollars, then it may be worth it to you.
Important note: It may be worth investing those extra premium dollars rather than buying an ROP rider. Your investments may yield a higher return than the premium dollars you'd get back from your insurer. Additionally, insurance companies typically don't pay interest on the premiums, and the value of money returned is not adjusted for inflation over time. Consult a financial advisor to fully understand your options.
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