Return of premium life insurance: What it is, how it works

To keep traditional life insurance policies active, you make monthly or annual premium payments that are not refundable. Return of premium life insurance (ROP) is a type of term life insurance that refunds your payments if you outlive your coverage. It’s also sometimes called return of premium term life insurance.

Though the prospect if receiving a refund on your premiums sounds appealing, ROP policies are a lot more expensive than standard term life insurance. 

Return of premium life insurance isn’t recommended for most people. Instead, consider buying a traditional term life insurance policy for your family’s financial security, and contributing any extra cash toward traditional savings or investment accounts.

What is return of premium life insurance?

A ROP life insurance policy is a type of term life insurance.

Term life is one of the most affordable life insurance coverage options on the market, only lasts for a set term, and comes with few rules and tax restrictions. It’s the best option for most people looking to protect their income and provide their family with a financial safety net to cover any debts — including a mortgage or any other types of personal loans.

Unlike traditional term life, however, in a ROP policy the insurer refunds your premiums at the end of the term. Some ROP policies pay back 100% of your premiums, while others offer only a partial return.

How does return of premium life insurance work?

ROP is added on to a standard term life insurance policy as a premium rider and lasts for the term of your policy — usually 10, 20, or 30 years.

Here’s how return of premium riders work:

• You make monthly or annual payments, called premiums, to keep the policy active.

• If you die while the policy is active, the death benefit is paid out to the beneficiaries named in your policy. The larger the death benefit amount, the more the premiums will cost.

• If the you outlive the term, the money you paid in premiums over the course of the policy is refunded tax-free to you at the end of the term.

Depending on the insurer, if you stop making premium payments or cancel your life insurance policy, you may not get your premiums back.

Average cost of return of premium life insurance

Because a return of premium life insurance comes with a “money-back guarantee” if you outlive the policy, it’s more expensive than typical term life insurance.

The average cost of return of premium life insurance is usually about two to three times higher than a basic term policy.

→ Learn more about life insurance rates

Pros and cons of return of premium life insurance

Pros of return of premium life insurance

For some people with specific life insurance needs, a ROP policy offers a few advantages.

• Refunded premiums that are not taxable

• A forced savings vehicle if your premiums are returned

• Lower cost than whole life insurance and other types of permanent life insurance

With the best return of premium life insurance companies, you get a guaranteed amount of money back down the line that could go to your loved ones, rather than taking risks in the stock market.

Cons of return of premium life insurance

For a majority of people, the cons of a return of premium insurance policy outweigh the pros:

• More expensive than a basic term life insurance policy

• Extra money is generally better invested or saved elsewhere

• Value of money you are refunded is depreciated due to inflation

• Limited number of policies available, making it more difficult to find the right coverage

More often than not, you’re better off buying a cheaper, traditional term life insurance policy and investing the money you save elsewhere with a higher return and lower fees, like an IRA account.

→ Learn more about term life insurance rates

Is return of premium life insurance worth it?

A return of premium life insurance policy may work for someone who can afford to pay extra each month and wants a relatively low-cost forced savings vehicle. But it’s not right for a majority of people who just need a simple life insurance policy to protect their family.

Receiving a sizable chunk of money when you’re nearing retirement is nice, especially if you don’t have to pay taxes on it.

But because you’re really just getting the money you paid toward premiums, it’s not extra money — it’s money that was already yours in the first place. Additionally, it’s money that has lost out on years of compound interest, so it’s worth less than if it was invested or saved in a traditional savings account.

“It’s like an interest-free loan to the insurance company,” says Ilya Karger, former senior sales manager at Policygenius. “When you put that money in, you’re getting less money out because of inflation.”

Alternatives to return of premium life insurance

There are other types of term life insurance policies worth considering instead. These policies are generally more affordable.

• Level term life insurance: Level term is another name for traditional term life insurance. It’s the most affordable life insurance option and offers straightforward coverage. It doesn’t refund your premiums at the end of the policy’s term.

• No-medical exam life insurance: Most life insurance applications include a medical exam to help the insurance company assess your risk of dying during the term of the policy. A no-medical-exam policy, such as an accelerated underwriting policy, allows you to skip the medical exam if you qualify.

The high costs and limited coverage options associated with return of premium life insurance make it a poor option for life insurance coverage. Instead, protect your family’s financial security with a traditional term life insurance policy and save for your future with traditional savings or investment accounts.

Frequently asked questions

What does return premium mean?

Return of premium means that the life insurance company will refund you the premiums you paid if you outlive the policy.

What is the catch with return of premium life insurance?

Although return of premium life insurance refunds your money at the end of its term, the catch is that it’s a lot costlier than a traditional term life insurance policy.

What companies offer return of premium life insurance?

Return of premium is offered by a limited number of life insurance companies. Speak to a life insurance agent to find the best return of premium life insurance companies.

Is return of premium life insurance worth it?

For most people, return of premium life insurance is not worth its high cost. Instead, consider buying a traditional term policy and utilizing traditional investment and savings accounts to build your nest egg.