Return of premium life insurance (ROP) is a type of term life insurance that refunds all or part of the payments you make if you outlive your coverage.
ROP policies — sometimes also called return of premium term life insurance — are usually two to three times more expensive than standard term life insurance — and might not be the best way to invest your money. Most people will be better off buying a traditional term life policy and contributing any extra cash toward traditional savings or investment accounts.
How does ROP work?
ROP is added on to a standard term life insurance policy as a premium rider and lasts for the full duration of your policy’s term — 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 in effect, the death benefit is paid out to the beneficiaries named in your policy.
If you outlive the term, some or all of the money you paid in premiums over the course of the policy — depending on the type of ROP option you purchased — 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.
Pros and cons 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
For a majority of people, the cons of a return of premium insurance policy outweigh the pros:
Two to three times more expensive than a basic term life insurance policy
The extra money that it costs 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
Is ROP worth it?
Return of premium life insurance is not usually worth the cost because you’ll miss out on the opportunity for your money to grow. Even though you do get money back at the end of the term, it’ll have less value than it would have if you invested it or even just put it in a high-yield 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.”
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.