Return of Premium Life Insurance Policies and Riders

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"Return of premium" (ROP) life insurance refers to a term life policy that pays back the money you spent on premiums if you outlive your length of coverage. However, the cost of an ROP policy will be significantly higher than a standard term policy with the same coverage limits.

You should also consider whether you'd get a better return by saving and investing that additional money spent on an ROP policy, as opposed to a standard term policy.

What is return of premium term life insurance?

ROP term life insurance is similar to a traditional term policy: You purchase coverage for a certain number of years — usually 20 or 30 — and if you die while the policy is in force, your beneficiary receives the policy's death benefit.

However, with an ROP term life insurance policy, if you don't die during the term, you will receive a check from the insurance company, for all premiums paid. A traditional term policy will not.

Most ROP life insurance plans have level premiums, so they won't increase over the initial term. But if you opt to renew annually after that term is up, the premium will increase each year.

A return of premium individual term life insurance policy can be structured in one of two ways:

  • As an optional add-on/rider to a traditional term life insurance policy
  • As its own standalone policy

No matter how your ROP life insurance is structured, your premiums will be much higher than for a standard term policy with the same death benefit. If you do outlive the term, though, the money you receive back will be tax free in most cases, since the payout doesn't exceed what you've paid in premiums.

However, the cost of any additional riders added to the life insurance policy and certain fees may not be included in the payout. Review the policy's specifics to understand how much money you'd get back.

Return of premium term insurance with cash value

Some ROP life insurance policies include a cash value component, which is usually limited to permanent policies. These are similar to whole life insurance policies, but provide coverage for the specified policy term only. They also build cash value at a slower rate.

Term life insurance
ROP term insurance
Whole life insurance
Builds cash value?NoYesYes
Maturity dateN/AEnd of term (e.g., 20 years)Typically age 100
Cash value at maturity dateN/AEqual to sum of premiums paidEqual to policy's death benefit
Surrender value$0Equals accumulated cash valueEquals accumulated cash value

The benefit of cash value ROP policies is that if you cancel, you'd get money back — as long as you held the policy for a certain period of time. Without cash value, if you cancel your ROP policy before the term expires, you would receive nothing in return. Don't cancel your policy, if at all possible, as you would sacrifice a portion of the premiums paid up to that point.

During the first several years of coverage, a cash value ROP policy typically has no surrender value. That's because the cash value doesn't grow linearly but exponentially, meaning each year a larger percentage of the premiums paid is included in the cash value.

For example, if you surrendered your 30-year ROP term policy in year 29, you'd get nearly the entire value of premiums paid back. But if you canceled the same life insurance policy in year 20, you might only receive 45% of the premiums paid.

You can also take out policy loans with cash value ROP policies just as other cash value policies. You'll just pay a small interest fee.

Pros and cons of return of premium term life insurance

Compared to traditional term life insurance, a return of premium policy has several benefits and drawbacks you should consider before buying.

Benefits of return of premium life insurance

  • A small percentage of term life insurance policyholders die during the period of coverage. This can make it hard to justify the cost of a policy. In theory, you could do better financially by buying a cheaper, standard policy and investing the money you would have spent on an ROP policy. But if you aren't good about saving or aren't confident that your investment returns would exceed the costs of an ROP policy, then choosing one is a fairly low-risk savings option — especially if you already want term insurance.

Cons of return of premium life insurance

  • When it comes to term life insurance, your quotes will be much higher for ROP than for a standard policy of the same size. Return of premium life insurance can range from 130% to several hundred percent of the cost of a standard policy with no ROP benefit.
  • Unless you purchase a return of premium policy with cash value, you'll receive no money back if you switch insurance companies. Essentially, you will have paid for a benefit you will not receive.
  • If you're a senior or believe you have a higher risk of dying during the policy term, ROP insurance isn't the best choice. Since ROP insurance quotes are higher, but the death benefit is fixed, each additional dollar you pay in premiums reduces the total given to your beneficiary.

Choosing the best term policy with return of premium

ROP life insurance is offered by most large life insurance companies. Companies offer slightly different versions, so compare multiple policies. In addition to the policy's structure, such as whether it builds cash value, the most important consideration is finding a plan with the cheapest incremental cost for ROP, compared with a standard term policy.

Say, for example, that you want a $500,000 life insurance policy with a 20-year term. If you were quoted $500 per year for a standard term policy and $1,500 per year for an ROP policy, the incremental cost would be $1,000 per year, or $20,000 over the policy term. Compare this to the total returned to you after 20 years, which would be $30,000, or about a 3.7% annualized rate of return.

The lower the proportion of your incremental cost to your total premium, the greater your return on investment if you outlive your policy.

Example return of premium policy
Annual cost of term coverage$500
Annual cost of ROP rider$1,000
Total annual cost$1,500
Total premiums paid (20 years)$30,000
Total cost of ROP rider (20 years)$20,000
Total return on ROP$10,000
Average annualized return on ROP3.7%

The best term life insurance plan for your financial situation is based in part on your objectives and willingness to accept risk.

For instance, if the company with the cheapest total cost offers a low return on the incremental cost, buying a standard policy and investing the money yourself may be the better option. On the other hand, if a company's ROP rider cost is low, but the total quote is greater due to a higher cost of term coverage, you would have to consider how much you're willing to spend for a better return.

Keep in mind that an ROP payment would be tax free, whereas returns on money invested in a brokerage account would be taxed.

Return of premium with whole and universal life insurance

A return of premium rider isn't often available for permanent life insurance policies. That coverage is designed to extend for your entire life, so you wouldn't outlive the policy, in theory. However, there are a few ways that a permanent life insurance policy would provide a return of premiums to either you or your beneficiary.

ROP guaranteed universal life insurance

Some life insurance companies offer guaranteed universal life insurance with a return of premium option, but these are quite different from ROP term life policies. With a guaranteed universal ROP policy, you'd have the option of surrendering your policy at certain points during coverage and receiving the sum of premiums paid.

This can be helpful if you're confident that you want permanent coverage but are willing to pay for the option to get your money back if a big life change occurs.

For example, say you purchase a guaranteed universal life insurance policy to ensure your spouse would have funds to live on in retirement, but they develop cancer. You might want the ability to get your money back to pay for medical expenses, particularly if their life expectancy is low and they'd likely die before you.

The only downside in this case is that you'd have to wait for one of the policy's ROP years to come up before receiving your money back.

Living past a policy's maturity date

Permanent life insurance policies come with a maturity date, at which point either the policy will be considered paid up or you'd receive its entire cash value as a payout. Whole life insurance policies, for example, typically mature when you reach age 100. Currently available universal life insurance policies often come with the option of maturity at age 100, 105 or as high as 121.

However, if you have an older permanent policy, it might mature at a lower age, such as when you turn 85. While this isn't a direct return of premiums, you would receive money back that you had paid into the policy's cash value.

Adding cash value to a policy's death benefit

When you purchase a life insurance policy, the amount of coverage you select is how much your beneficiary would receive if you die. Any cash value left in the policy would go to the insurance company. There are some exceptions, though. Some permanent life insurance policies give you the option of adding the cash value to the death benefit your beneficiary receives. But, similar to an ROP policy, this option is significantly more expensive.

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