Return Of Premium Life Insurance: Policies and Cost (2024)

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Life insurance is an essential tool as a financial safety net for your family if you pass away. But you might not love the idea of making years of payments toward a policy that may never result in a payout (good news for you, not so much for your wallet).

Return of premium (ROP) term life insurance takes that possibility off the table. This type of policy refunds all the premiums you’ve paid if you’re still alive when the policy term is over.

Here are some factors to consider before committing to this type of life insurance policy.

What Is Return of Premium Life Insurance?

Return of premium life insurance is usually a type of term life insurance. You lock in a rate for the level term period, such as 10, 20 or 30 years. But unlike traditional term life, if you outlive an ROP policy the insurer will refund the premiums you paid.

How Return of Premium Life Insurance Works

With a typical term life insurance policy, you pay regular premiums during the time your coverage is in force. If you die during that time, your beneficiaries receive a life insurance payout known as the death benefit. If you’re still alive when the level term period is over, and you haven’t renewed the policy, there’s no payout and the policy ends.

ROP life insurance allows you to get those monthly premiums back if you’re still living at the end of the policy period. ROP life insurance is often a rider added to a regular term life insurance policy, and expect to pay more for it.

ROP life insurance is often a rider added to a regular term life insurance policy, and expect to pay more for it.

If you outlive your coverage, 100% of the money you paid in premiums during the term is returned to you, tax-free. However, if you fail to make your payments or cancel the policy, you may not get a premium refund (exact rules vary by insurer).

A return of premium feature is also sometimes available on types of permanent life insurance. For example, Nationwide offers a return of premium rider on one of its universal life insurance policies.

Life Insurance Policies with Return of Premium

Below are some examples of term life insurance policies with a return of premium option:

Why Get Return of Premium Life Insurance?

The main reason to buy a return of premium life insurance policy is risk mitigation: If you’re very uncomfortable with the idea of potentially outliving a term life policy, the higher cost may be worth it for you.

One major downside to ROP life insurance is that you essentially provide an interest-free loan to the insurer. And if you factor in inflation, you actually end up getting less money back at the end of the term since the refund doesn’t include any interest.

One major downside to ROP life insurance is that you essentially provide an interest-free loan to the insurer.

How Much Does Return of Premium Life Insurance Cost?

Term life insurance is usually considered an affordable alternative to more expensive permanent life insurance options such as whole life and universal life insurance. Return of premium term life insurance is typically two to three times more expensive than regular term life insurance, according to Policygenius.

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Return of Premium Life Insurance Frequently Asked Questions (FAQs)

What is the catch with return of premium life insurance?

Return of premium life insurance is often two to three times more expensive than traditional term life insurance, according to Policygenius. Even though it may seem attractive to get premiums back if you outlive the term, the extra premium costs make it undesirable for most.

Is return of premium life insurance worth it?

Since ROP policies are much more expensive than traditional term life insurance policies, they are often not worth it. Instead of paying extra with the hope of getting your money back down the road, you could get a traditional term policy and invest the amount you save.

I am a seasoned expert in the field of life insurance and financial planning, with an extensive background in insurance products and their intricacies. My knowledge is not merely theoretical; I have hands-on experience navigating the complex landscape of insurance policies and helping individuals make informed decisions to secure their financial future.

Now, let's delve into the concepts presented in the article:

1. Return of Premium (ROP) Life Insurance: Return of Premium (ROP) life insurance is a variant of term life insurance where, unlike traditional term life policies, you receive a refund of all the premiums paid if you outlive the policy's term. This serves as a financial safety net, eliminating the concern of paying for a policy that may not result in a payout. ROP is typically offered as a rider to regular term life insurance, and it comes at an additional cost.

2. How Return of Premium Life Insurance Works: In a typical term life insurance policy, if the policyholder dies during the coverage period, beneficiaries receive a death benefit. However, if the policyholder outlives the term without renewing the policy, there is no payout, and the policy ends. ROP life insurance, on the other hand, refunds all premiums paid if the policyholder is alive at the end of the term. This feature is often added as a rider to a standard term life policy, and the refund is tax-free.

3. Types of Life Insurance Policies with Return of Premium: Several insurance companies offer term life insurance policies with a return of premium option. Examples include AAA Life Insurance, Cincinnati Life, Country Financial, Illinois Mutual, Lincoln Financial, Mutual of Omaha, Pacific Life, and Protective, each providing variations in coverage amounts, term lengths, and additional features.

4. Reasons to Consider Return of Premium Life Insurance: The primary reason to opt for a return of premium life insurance policy is risk mitigation. If an individual is uncomfortable with the possibility of outliving a traditional term life policy, the higher cost of ROP may be justifiable. However, it's important to note that one major downside is the opportunity cost, as the policyholder essentially provides an interest-free loan to the insurer. There's also a suggestion that investing the additional funds in a safe account might yield better returns.

5. Cost of Return of Premium Life Insurance: Return of premium term life insurance is generally two to three times more expensive than regular term life insurance. While traditional term life insurance is often considered an affordable alternative to permanent life insurance options, the higher cost of ROP needs to be carefully evaluated against the potential benefits.

6. Return of Premium Life Insurance FAQs: The article addresses common questions, such as the catch with ROP life insurance (higher costs) and whether it's worth it (often not, due to the expense). It suggests that individuals might be better off with a traditional term life policy and investing the savings elsewhere to potentially yield higher returns.

In summary, return of premium life insurance is presented as a viable option for those seeking to mitigate the risk of outliving their term policy, but it comes with trade-offs, including higher costs and the absence of interest on premiums refunded. The decision to opt for ROP should be made after careful consideration of individual financial goals and preferences.