A return of premium (ROP) life insurance policy can refund up to 100% of your premiums at the end of the term. Find out more about how it works in our guide.
Return of premium (ROP) life insurance is term life insurance that refunds your premium payments if you outlive the term of your coverage. In exchange for this benefit, you’ll pay more in premiums while the policy is in force. While some see this as a forced savings account of sorts, there are other considerations to think about before you decide if ROP life insurance is the best life insurance for you.
How Does Return of Premium Life Insurance Work?
With regular term life insurance, you lock in a level rate with a period of time that might be 10, 20 or 30 years. When the term is over, you can usually renew the policy annually but at higher rates. Your beneficiaries receive a payout if you die when the policy is in force. However, if you are alive at the end of the policy, no payout takes place.
With ROP insurance, you can get those monthly premiums back if you’re still living when the policy term expires. Some companies allow you to add or purchase ROP life insurance coverage and integrate it into an existing policy in the form of a return of premium rider. The catch is that ROP insurance is more expensive in exchange for receiving that payback benefit.
When you outlive the term, with ROP life insurance, you get up to 100% of your premiums returned to you tax-free, minus administrative fees and related charges. You may not get a premium refund if you missed one or more premium payments or cancel the policy. That said, insurers have different rules, so this may vary by provider.
The other benefit is that the ROP life insurance builds cash value over time, which is not normally true for term life policies. With enough cash value, policyholders can borrow against the policy, withdraw money or surrender the policy for cash if coverage is no longer needed.
Who Should Get ROP Life Insurance?
ROP life insurance offers some attractive benefits for policyholders, but there are some drawbacks as well. Here are some pros and cons to consider.
Pros
- ROP policies are the equivalent of a forced savings option if your premiums are returned.
- Premiums are refunded in as little as 10 years depending on the length of the policy term.
- Refunded premiums are not taxable.
- May cost less than whole life insurance and other types of permanent life insurance.
Cons
- Policies are more expensive than a basic term life insurance policy.
- Additional premium costs are usually better invested or saved elsewhere with vehicles that offer higher returns and lower fees, such as an IRA account.
- The value of the premiums you are refunded is depreciated due to inflation.
- Many insurers don’t offer an ROP rider, so finding the right policy may be more challenging.
What Will I Receive as a Refund From My Term Life Insurance Premiums?
The exact amount you receive from your return of premium life insurance policy varies by insurer, but typically it can be as much as 100% of the policy premiums minus administrative charges, late payment fees or similar costs. The percentage amount may vary by provider.
ROP Life Insurance vs. Other Policy Types
In addition to ROP life insurance, there are several other types of term life insurance worth considering.
Level term life insurance. This is traditional term life insurance issued for specific terms. Often you can choose a 10, 20 or 30-year term. It’s the most affordable and easy-to-understand life insurance coverage. You pay the same premiums for the entire term of the policy. At the end of the term, your coverage simply ends. You may be given the option to extend the term, but you’ll have to pay a higher premium because you are now older and present a greater risk.
Increasing term insurance. With this type of policy, you can increase your death benefit coverage at certain milestones of the policy term. These milestones are stated at the inception of the policy. They are valuable in protecting the amount of coverage changing needs of families who may need more coverage in the future. In exchange for this guarantee, policy premiums have an extra cost compared to basic term life policies.
Decreasing term insurance. This type of policy decreases the death benefit at predetermined times during the policy’s life. This may be a good policy for families as children grow up and move out on their own.
Convertible term insurance. This type of policy can be converted into a different kind of insurance plan later. This may be a good option if you expect your financial priorities to change in the coming years. For example, a term life insurance policy may work best now, but you may decide later that a whole life policy is more appropriate coverage for you and your loved one’s needs.
No medical exam life insurance. When you buy a term life insurance policy, part of the process usually involves a medical exam to assess your health and risk factors so that insurers know how much to charge you for premiums. A no-medical exam insurance policy bypasses this process, but the trade-off is that your death benefits will be significantly lower for the first couple of years the policy is in force.
Cost of ROP Life Insurance
While the return of premium benefit may be attractive, you will pay quite a bit more for that flexibility and privilege. Depending on several factors, your premiums can be anywhere from two to five times the premium costs of other term insurance. If you’re shopping for a cheap life insurance policy, you may want to opt for a traditional level term insurance policy.
Term life insurance is usually considered an affordable alternative to more expensive permanent life insurance options such as whole life and universal life insurance.
For example, if you’re a healthy 40-year-old looking to buy a 20-year, $500,000 policy, you can expect to pay nearly five times as much for a return of premium policy compared with a standard term life insurance policy without ROP benefits. Sample premium costs for ROP life insurance for a 40-year-old non-smoker in excellent health is about $1,600 for a man and $1,450 for a woman. Of course, these amounts vary by provider and with other known factors in place.
By comparison, a 40-year-old male with excellent health buying a $500,000 term life insurance policy will pay about $228 annually for a 10-year term and $300 annually for a 20-year term. If you smoke and are in poor health, those premium costs can jump to about $750 for a 10-year policy and over $1,000 annually for a 20-year policy.
Factors That Affect Cost
Age and Gender. According to actuarial tables, the younger you are, the longer you’re expected to live. That makes the cost to insure you for a limited term less costly and risky for insurers. Whether you are a man or a woman will also play a role in premium costs.
Smoking. As the example above notes, you will pay much more if you smoke.
Pre-existing health conditions. Unless you buy a no-medical exam policy, you’ll be required to undergo an exam to determine your general health and to identify conditions that may lead to more serious complications or death. Your premiums will be higher if you have heart disease, chronic conditions such as diabetes, are overweight or have other long-term health challenges. In addition, insurers will also look at your family health history to see if you are more susceptible to certain kinds of diseases and conditions.
Hobbies and occupations. These lifestyle factors may help insurers spot added risks. If you skydive on the weekends or are in a dangerous occupation, expect to pay more.
Policies With Return of Premium
ROP life insurance is not offered by all providers. However, there are enough reputable insurers who can work with you if you want to explore this policy option. Here are three of the best return of premium life insurance providers to consider.
Our Conclusion on ROP Life Insurance
ROP life insurance can be a good option in some cases, depending on your overall financial and estate planning needs. However, premium costs are a major drawback, and some financial advisors and industry experts advise buying a traditional term life insurance policy using that additional cost to invest in other products with higher possible returns. When choosing a policy, we recommend that you get several life insurance quotes to make sure you find the best fit for your needs.
Frequently Asked Questions ROP Life Insurance
Yes, return of premium life insurance has cash value. When shopping for an ROP policy as an add-on, ask your agent about this since terms may vary by insurer.
No, you do not pay taxes on return of premium life insurance. Any premiums returned to you are considered a refund and not subject to taxes.
ROP policies are term life policies with a specific policy end date. Whole life policies are in force for the insured’s entire life. This assumes premiums and other policy requirements are met throughout the policy’s life.
Depending on your situation, the maximum amount of ROP life insurance you can buy should have the same limits as traditional term life insurance. It’s best to consult with your financial planner and insurance agent to determine what level is right for you and how it works into your overall financial planning matrix.
The two primary differences between regular life insurance and return of premium life insurance are that you can get your premiums back with an ROP policy; however, you’ll pay a lot more for the privilege.