Return-of-premium disability insurance may refund those pesky premiums, but the costs may far outweigh the benefits if you ever need to use your coverage.
When you have disability insurance, you’ll receive monthly disability insurance benefits if you become disabled and lose your ability to earn an income. Your disability insurance policy is kept in force by paying periodic premium payments, which typically amount to about 1% to 3% of your income. For many people, that’s a small price to pay for the peace of mind that you’ll be able to continue paying bills and putting food on the table after becoming seriously injured or ill.
But if those costs seem high, you may be able to add a return-of-premium rider to your policy by paying additional premiums. The return-of-premium rider refunds you a certain percentage of your premiums paid after a certain period of time, the exact specifics of which vary from insurer to insurer.
This may seem like a great deal, especially if you’re concerned about getting “nothing” after paying for disability insurance all those years and never filing a claim for benefits. But the return-of-premium rider could be very costly to add and may not be the best option for most people.
The return-of-premium (ROP) rider is a feature of long-term disability insurance. Every insurer has its own version of the return-of-premium rider, which is sometimes called the surrender-value rider. (The return-of-premium rider is also a feature of some life insurance policies.) At its core, the rider offers a percentage of your premiums back at either a predetermined juncture or after a certain number of years. This refund is paid as a lump sum in cash and is generally not taxable.
If you’re interested in getting long-term disability insurance with the ability to receive a refund of your premiums, a licensed representative at Policygenius can help you navigate your options and decide if it’s right for you. If you already have disability insurance, you may able to add the ROP rider retroactively, but you could be required to pay the rider premiums back to the date of your policy’s issue.
Some things to keep in mind when purchasing a return-of-premium rider:
Depending on the insurer, you may be able to receive an ROP refund when you hit certain milestones, for a certain percentage of premiums paid during those years. Some insurers set the milestone at seven or eight years and some set it at 10 or 20 years.
Afterwards, the clock starts again, and you should be eligible for another ROP refund at the end of the next milestone period.
Other insurers will only return your premiums at a certain age, usually age 65 or 67, the same age your benefits period would expire if you were claiming benefits up to that age.
If you have the ROP rider, there may be other ways to receive the return of premiums that don’t involve reaching a certain age:
You can simply ask for it, although this would surrender your policy.
If your policy lapses, some ROP riders will still refund a certain percentage of your premiums paid up to that point.
If you die, your ROP payment may be made to your estate or any beneficiaries you named.
You can typically receive a higher percentage of your total premiums if you’re willing to pay more for the rider. Insurers offer anywhere from a 50% refund, an 80% refund, or even a 100% refund for premiums paid up to the year during which you become eligible for the refund. (The 100% refund is often only a feature of return-of-premium riders that pay out at age 65 or 67.)
However, if you became disabled while your policy was in force and claimed benefits, the total amount you claimed in benefits will be subtracted from the amount you’re owed from the ROP rider. To figure out how much you should be paid, multiply your total premiums paid during the cycle offered by your policy by the percentage you chose, then subtract any benefits.
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Return-of-premium disability insurance seems like a good investment, but it can be cost-prohibitive. While estimates vary and depend on both the insurer and insured, the rider may double or even quadruple your premiums.
You may need disability insurance to protect your income, especially if you have major debt obligations like student loans or a mortgage. But you might be better off taking what you’d be spending on the rider and investing it into a savings account. Here’s why:
Say you pay $100 per month for a long-term disability insurance plan with a $5,000 per month benefit amount. That same policy could cost as much as $400 per month with a return-of-premium rider that pays out an 80% refund of the premiums you paid every 10 years. At the 10-year mark, you get a $38,400 lump-sum payment, which is a decent chunk of change.
But if you were disabled for just eight months during that time – meaning you received $40,000 in disability insurance payments to replace your regular income – then the benefits would more than negate the refund you’d receive from your premiums. In other words, you essentially paid four times the premium for the same amount of coverage.