You’re more than likely unfamiliar with return of premium life insurance.
A relatively unpopular option (accounting for just 2% of term life sales according to a study by LIMRA). return of premium life insurance is a type of policy that most people overlook when it comes to buying life insurance.
But return of premium life insurance, often shortened to ROP life insurance, is well worth a second look. It’s a solid option for many people, even though it’s not very common.
A simple explanation is that it offers strong term life coverage while simultaneously refunding your premiums if your policy expires before you die.
Here’s everything you need to know about return of premium life insurance.
What Is Return of Premium Life Insurance?
Good term life coverage and refundable premiums – that can easily sound too good to be true at first glance.
But that’s exactly what return of premium life insurance provides. You get solid term live coverage plus all of your premiums are returned, more often than not in full, if you outlive the policy.
Of course, there is a catch.
And that catch is increased monthly premiums. Know you’ll pay much more per month for ROP life insurance than many alternative options.
According to Investopedia, the majority of ROP life insurance policies return 100% of the premiums you paid, completely tax-free.
NerdWallet follows this up with the claim that you can expect your ROP premiums to be right around 30% more expensive per month than other options.
Both organizations go on to agree that while most providers refund the entirety of your premiums, they don’t usually refund any fees, additional riders, or payments apart from the initial policy premiums.
ROP life insurance is most appealing to those that hesitate at the thought of buying term life insurance with the possibility of never needing to use it.
How Does Return of Premium Life Insurance Work?
Most ROP policies are offered for a 20-year or 30-year term.
If you die during the term of coverage, your beneficiaries will receive your life insurance death benefit.
If you outlive the term of coverage, on the other hand, you will receive all of the premiums you paid back, tax free.
This marks a major difference between ROP term life coverage and traditional term life insurance coverage.
With traditional term life insurance, you do not receive your premiums back if you outlive the original policy.
The trade-off is much higher premiums for an ROP policy. Although this is typically around 30% more per month, Trusted Choice states that it can be as much as three times more per month.
Naturally, you must weigh the pros and cons to make certain this money-back feature is right for you.
Return of Premium Life Insurance Pros and Cons
It’s essential to consider the pros and cons of any life insurance policy before making your final decision.
Here are the pros and cons of ROP life insurance:
Return-of-Premium Pros:
- Money-Back Feature – You get 100% of the premiums you paid back if you outlive your policy.
- Forced Savings Vehicle – Many people view ROP life insurance as a forced savings vehicle – where if they outlive their policy, they are refunded the entire amount paid, which they can then put into a retirement savings account.
- Strong Coverage – Mot ROP policies have just as strong of coverage as traditional term life plans.
Return-of-Premium Cons:
- More Expensive – An ROP policy can be anywhere between 30% and three times more expensive than term life coverage.
- No Interest – Your premiums don’t earn interest in an ROP policy. So, if you’re planning to use the return for retirement savings, you might be better off just putting those savings into another account that can accrue interest instead.
- Hold for Entire Term – Canceling ROP life insurance before the end of the policy results in not receiving a refund. The same is also true if you miss a payment.
Remember to always check with your life insurance agent about the specifics of the particular policies you’re considering.
All life insurance companies provide slightly different ROP policies. In addition to the cost of premiums, the minimum amount of coverage and cancelation policy vary widely from provider to provider.
A good chunk of the biggest life insurance providers in the United States don’t even offer return of premium life insurance in the first place.
Is Return of Premium Life Insurance Right for You?
ROP life insurance isn’t for everyone.
However, depending upon your specific financial goals and life situation, it certainly can be worth it.
It’s important to understand what ROP life insurance entails, its pros and cons, and exactly what type of coverage you qualify to receive.
Beyond that, speak with your life insurance agent to not only understand what type of ROP policies are available to you, but also to explore alternative options.
To put it simply, return of premium life insurance is a good option for those that want low-risk life insurance, can manage the more expensive premiums, and like the idea of using a forced savings vehicle to put towards retirement.
Those that simply want an affordable life insurance plan to protect their family will do well to look at other options.
Alternative Life Insurance Options
Return of premium life insurance is far from your only life insurance option.
The two most popular types of life insurance, term life and whole life, are both worth considering.
Here’s a little more information about each:
- Term Life Insurance – A basic, affordable policy for a specific term (typically 20 or 30 years) without the return of premiums upon expiration.
- Whole Life Insurance – A comprehensive policy that covers you for your entire life (or until you stop making payments) with no return of premiums upon expiration. Can cost more than even an ROP policy. Typically comes with a cash value element.
Once again, it’s best to talk with your life insurance agent, who is familiar with your specific financial and life situation, to make the best-educated decision possible.
Final Thoughts on Return of Premium Life Insurance
Return of premium life insurance is an enticing option for those wary of paying life insurance premiums only to outlive their policy.
Although it certainly has its fair share of benefits, the much higher premiums, compared with traditional life insurance, are more than enough reason to give you pause.
An independent life insurance agent can help you analyze the pros and cons, as they apply specifically to you so that you can make the right life insurance choice for your family.
