Return of premium insurance refunds your life insurance payments if you outlive the policy’s term, but comes with some caveats.
Updated April 2, 2021|3 min read
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To keep traditional life insurance policies active, you make monthly or annual payments that are not refundable. Return of premium life insurance (ROP)—sometimes called return of premium term life insurance—is a type of term life insurance that refunds your payments if you don’t die during the policy’s term. Though the refunded premiums make for an appealing coverage option, the policy comes with a catch—it’s a lot costlier than a traditional term life insurance policy.
Because of this, 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 money towards traditional savings or investment accounts to accrue wealth.
A limited number of insurers offer return of premium life insurance
Policy costs for return of premium life insurance are two to three times higher than traditional term life insurance
You will see higher returns by buying traditional term life insurance and investing the difference
A return of premium life insurance policy is a type of term life insurance, meaning it lasts a set period of time and then expires. Unlike traditional term life insurance, however, return of premium insurance returns your premiums at the end of the term.
Return of premium life insurance is added on to a standard term life insurance policy as a rider and lasts for the term of your policy—usually a 10, 20, or 30 year term. Here’s how it works:
The policyholder makes monthly or annual payments, called premiums, to keep the policy in force.
If the policyholder dies while the policy is in force, a pre-set cash payment called a death benefit will be paid out to the beneficiaries named in the policy. The larger the amount of coverage, the more the premiums will cost.
If the policyholder outlives the term, 100% of the premiums paid over the course of the policy are refunded tax-free to the policyholder 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.
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.
For some people with specific life insurance needs, there are a few pros of a return of premium life insurance policy:
Refunded premiums that are not taxable
A forced savings vehicle if your premiums are returned
Lower cost than whole 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.
For a majority of people, the cons of a return of premium insurance policy outweigh the pros:
Return of premium is two to three times more expensive than a basic term life insurance policy
Forced savings are generally better invested or saved elsewhere
Value of the money you are refunded is depreciated due to inflation
Limited number of policies available, making it more difficult to shop around for a policy that suits your needs
We recommend that you buy term life insurance and, instead, invest the difference. 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.
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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 life insurance shoppers, who just need a basic term 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. 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, Senior Sales Manager at Policygenius. “When you put that money in, you’re getting less money out because of inflation.”
While a return of premium life insurance policy offers a tax-free premium refund, the tradeoff is the upfront cost (higher premiums) and opportunity costs (missing out on better investment vehicles) that come with them.
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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. Unlike return of premium life insurance, 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 instant or accelerated underwriting policy, will allow 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.
Return of premium means that the life insurance company will refund you the premiums you paid if you outlive the policy.
Although return of premium life insurance refunds your money at the end of its term, the catch is that it is a lot costlier than a traditional term life insurance policy.
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.
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.
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