You get term life insurance to protect your loved ones. The policy provides financial protection for those you leave behind if you die unexpectedly.
In reality, you hope to outlive the policy. If this is the case, there’s no payout. The premiums you pay to keep the policy active are money lost. The only way to get a refund is by purchasing a return of premium rider.
In this guide, we explain how return of premium life insurance works and if it’s worth the extra cost.
What Is a Return of Premium Rider?
First, to understand how return of premium life insurance works, let’s review what term life insurance is.
Term life insurance is temporary protection. The coverage lasts 10-40 years, depending on your chosen term length.
If you die during the term, your beneficiaries will receive a death benefit check from the insurance company. The amount they receive is based on the coverage amount you have. It can range from $50,000 to tens of millions.
Term life insurance is very customizable and budget-friendly. The downside is if you outlive the policy, there is no payout.
A return of premium rider ensures that, if you outlive your policy, you get a percentage of the premiums refunded.
If you aren’t sure about buying term life insurance because you think it may be a waste of money if you don’t die, then learning about return of premium riders is beneficial.
How Does Return of Premium Life Insurance Work?
If you choose to buy the return of premium (ROP) rider for your term life insurance policy, you’ll receive a refund of the premiums you paid if you outlive the term. So, with ROP, either your beneficiaries get the death benefit, or you get a refund of the premiums you paid.
How Much Does Return of Premium Life Insurance Cost?
Term life insurance is the most affordable type due to its simplicity and temporary nature. The insurance company is betting that you will outlive the policy.
However, by adding a return of premium rider to your term policy, the premiums increase significantly. Consider the rates in the table below. These quotes are for a healthy, non-smoking male with a Preferred Plus risk class (the best rates possible).
| Estimated Monthly Cost of a 20-Year $500,000 Policy for a Healthy Male | ||
|---|---|---|
| Age | Term Policy | ROP Term Policy |
| 30 | $18.84 | $94.60 |
| 40 | $28.42 | $141.24 |
| 50 | $69.48 | $362.56 |
| 60 | $199.56 | $1,023.88 |
| Estimated Monthly Cost of a 20-Year $500,000 Policy for a Healthy Male | ||
|---|---|---|
| Age | Term Policy | ROP Term Policy |
| 30 | $18.84 | $94.60 |
| 40 | $28.42 | $141.24 |
| 50 | $69.48 | $362.56 |
| 60 | $199.56 | $1,023.88 |
As you can see, you’re going to pay about five times more for return of premium term life insurance.
What Types of Life Insurance Offer ROP Riders?
Term, permanent, and accidental death benefit policies may all have return of premium options. However, fewer and fewer insurance companies offer it.
How ROP riders work can vary across life insurance companies. In general, here’s how they work within the various types of life insurance:
- With term life insurance, the ROP rider would refund the premiums you’ve paid if you outlive the policy.
- With accidental death benefit insurance, the ROP rider would refund you a set percentage of the premiums you’ve paid if you cancel the policy or outlive the term.
- With permanent life insurance, the ROP rider allows you to surrender your policy and receive some or all of the premiums back.
ROP riders are most commonly associated with term life insurance.
See what you’d pay for life insurance
Return of Premium Life Insurance Pros and Cons
Unsure if return of premium life insurance is worth it? Let’s discuss the pros and cons.
Pros of Return of Premium Term Life Insurance:
- You get your money back if you don’t die during the term.
- The refunded premiums are not taxed.
- Costs less than permanent life insurance.
Cons of Return of Premium Term Life Insurance:
- Premiums are much higher than regular term life insurance.
- If you cancel your term policy, you don’t get a refund.
- The value of your refunded premiums depreciates due to inflation.
- Return of premium life insurance is becoming harder and harder to find.
Is a Return of Premium Rider Worth It?
By buying ROP insurance, you’re essentially giving the insurance company a free loan. They’re investing your premiums while your policy is inforce, but you don’t receive any of the interest they earned if you outlive it. And, due to inflation, if you get a return of your premiums, its value will be less 10, 20, or 30 years down the road.
In most cases, you’re better off going with the far cheaper regular term life insurance and investing the difference. However, if you’re on the fence about buying life insurance because you don’t like the idea of potentially not getting anything in return, then an ROP rider may appeal to you.
If you’re willing to pay extra for ROP term, here are some scenarios in which ROP winds up being quite convenient:
Divorce Requirements
ROP can be a good fit for divorced parents. When young children are involved, the non-custodial parent is usually required to maintain life insurance for the benefit of the custodial parent and/or children. ROP may allow parents to fulfill this life insurance support obligation and perhaps even get a full refund of paid premiums.
Buy-Sell Agreements
ROP can be a good fit for business partnerships. If the partners outlive the policy, the premium refund can be used to help fund a business buyout. If one of the partners dies, the death benefit can provide the necessary buyout funds.
College Funding
If you are planning to pay for your child’s college tuition, an ROP policy can help. If you die during the term, the death benefit ensures your child can still afford college. If you outlive the policy, the refunded premiums can go toward paying off student loans.
Paying Off the Mortgage
An ROP policy could protect your loved ones and ensure they wouldn’t need to sell the home if you died prematurely.
For example, if you have a 30-year mortgage loan, you can purchase a 30-year return of premium term policy. The death benefit can help pay off the mortgage if you die during the term. If you outlive the policy, the refunded premiums can be used to remodel the house.
The bottom line is to ensure you financially protect your loved ones with life insurance.
An ROP is just one of many different life insurance policy riders that exist. Learn what they are and if there are others you should consider.
Get a Life Insurance Quote Through Quotacy
As a broker, we have access to many different life insurance companies, including those that offer return of premium riders.
More often than not, we recommend traditional term life insurance without the ROP rider. You can get an instant term life insurance quote online now to see what life insurance may cost you.
If you want to see ROP life insurance quotes, contact us directly.
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