May 29, 2019

Return of Premium Life Insurance

Read more about Life Insurance

Do you want a life insurance policy that refunds the dollars you've paid into it? A Return of Premium (ROP) policy may be the answer. See if this coverage is right for you in our guide.

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Term Life is the most popular type of insurance policy, largely because it costs less than other types.

This period of time, or "term," is designed to ensure financial protection for your loved ones should you die prematurely. The most common terms are 10, 20 and 30 years, though some companies also offer 15- and 25-year options.

But what happens if you live past the term? A return of premium life insurance policy (ROP) or rider can ensure you don't throw away the premiums you spent on your term life policy.

Read on to learn if a ROP may be worth the added cost.

What Is Return of Premium Life Insurance?

A return of premium life insurance (ROP) refunds the premiums you paid if you live through the term of your policy. You'll get 100% of the premiums returned, unless you have other riders or fees associated with the policy.

For example, if you paid $50 a month for a 20-year term, you'll get $12,000 ($50 x 12 x 20) back when the term expires.

You can either purchase a return of premium policy or add it as a rider to a traditional term policy.

A rider is an add-on feature that extends the usefulness of policy coverage. Some riders are included in your coverage, while others add an additional cost.

ROP Cost
A ROP policy could cost you $300 or more annually depending on your age and health status. Regardless of the length of your term, those extra dollars could add up fast.

On average, you'll pay 20% to 40% more per month for an ROP rider.

Even though you'll get premiums returned to you at the end of the term, consider whether those additional dollars are affordable in your current your financial situation.

You may also talk to a life insurance agent or request quotes online for personalized pricing.

If you have a term policy without a ROP rider, consider exteƒnding or renewing the coverage when the term ends.

Most term policies do not "technically" expire until you reach age 95. You can keep your policy in place and continue paying monthly until you decide you no longer need the coverage. However, you will face much higher premiums.

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What Are the Pros of a ROP Policy?

Premium Refunds
You won't lose your money if you end up not needing your insurance benefit.

Tax-free Refunds
Since the return of premiums is considered a refund, it's not taxable.

ROP policies offer the protection you need virtually risk-free. But what are the downsides?

What Are the Cons?

Cost
ROP policies and riders add cost to traditional term policies (though they typically still cost less than a permanent policy).

Limited Options
Not all insurance companies offer them, and some offer only specific term lengths or minimum/maximum coverage amounts.

Poor Savings Technique
Some people consider a ROP policy as an investment or savings option since the money is being saved in a safe place. But those funds are not being invested or earning interest.

Since there is no investment or cash value component for ROP policies, they are not an ideal way to save.

Instead, you could invest the money spent on premiums into an investment or high-yield savings account.

Alternatives to ROPs

Term life insurance covers a specific period of time, usually the years when you need coverage the most. A return of premium policy or rider ensures you get your money back if you outlive that term.

Term Life
You should choose term life if:

  • You only need life insurance to replace your income over a certain period, such as the years you're raising your children or have an outstanding mortgage.

  • You want a simpler, more affordable policy.

Whole Life
Whole life insurance provides lifelong coverage and includes an investment and cash value component.

The three main benefits to a whole life insurance policy are:

  1. Guaranteed Cash Value Growth
    The cash value account will grow over time. You can normally access that money any time to use for retirement, emergency funds, or other bills. Withdrawals often come with a fee or other contingencies, so you'll want to be sure you're familiar with your policy.

  2. Guaranteed Death Benefit
    The death benefit is a stated amount of proceeds paid to your beneficiary upon your death.

  3. Guaranteed Level Premiums for Life
    Whole life insurance premiums are higher because the policy lasts forever and has cash value. However, the premium will not increase or decrease throughout your life, so it's easy to budget for.

Choose a whole life insurance policy if:

  • You want to provide money to your heirs to pay estate taxes.
  • You have lifelong dependents such as a child with special needs.
  • You want to spend your retirement savings but still leave an inheritance for your beneficiaries.

Universal Life Insurance
Universal Life Insurance provides a permanent death benefit with added cash value. When you pay your premiums, part of the dollars go into a cash account that is credited each month with interest. The rest goes toward paying the death benefit.

Your premiums are not fixed, so the amount you pay each month can change month-to-month. But you have more control and access to the dollars that go into the cash account.

Variable Life
Similar to Universal Life, part of your premium is contributed to a cash account. The difference in Variable is that the cash value can be invested in a variety of different accounts.

Examples of investment funds are:

  • Stocks
  • Bonds
  • Equity funds
  • Money market funds

Talk with a life insurance agent financial advisor about your options. An advisor can help you decide what type of life insurance is right for you.

Is ROP Life Insurance Worth It?

The answer depends on your financial situation and coverage needs.

If you need coverage for a certain period of time, a term policy and ROP rider and are a simpler, more affordable choice.

If an investment and/or cash value component is important to you, consider a whole, universal, or variable life insurance policy.

An ROP rider ensures your premiums will be returned to you. And you won't have to pay taxes on the premium returns.

But remember, you're getting money back that has always been yours WITHOUT any growth or increase in value. Also, this type of policy or rider will cost extra money each month.

That money might have been invested in other ways for a meaningful return.

If you invest instead of purchasing a ROP policy or rider, you may lose money (depending on the investment). A return is not guaranteed, like it is with a ROP policy.

Bottom Line

A return of premium policy or rider refunds your term life insurance premiums if you outlive your policy. Though you'll pay a slightly higher premium, it may be worth it to have those dollars returned to you.

Make sure you can afford the monthly premium long-term, especially on a 20- or 30-year term policy. If you aren't sure about your options, talk to an independent life insurance agent for answers to your questions.

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