Term life insurance is an affordable option for many people looking to insure their lives for 10, 20, and even 30 years. However, after this, your cover will end and you’ll usually forfeit the premiums you’ve paid.
Luckily, there are term life insurance plans that offer a refund or return of premiums to policyholders, these are known as return of premium (ROP) term life insurance plans.
In this article, we will discuss what ROP life insurance plans are, how they work, and how they compare to other term life insurances.
Return of premium term life insurance is a special form of term life insurance that pays back some or all of the premiums paid by a policyholder if their beneficiaries do not claim a death benefit.
These plans offer the same structure of coverage as an ordinary term life insurance plan. However, with a return of premium plan, a policyholder will get some of their premiums back when the policy expires.
For example, let’s say you buy a 20-year ROP term life insurance policy. If you do not die during this period and your coverage ends, your insurance provider will refund you a portion of the premiums you’ve paid to them for coverage.
With a traditional term policy, you won’t receive a payout after the policy has ended. However, with an ROP policy, once your coverage ends you will receive a portion of your premiums paid.
Most ROP term life insurance plans are level premium plans, which means premiums don't change over the initial term length.
However, if you want to renew your plan after your initial coverage period ends, the premiums you pay will increase. In general, ROP life insurance policies are more expensive than standard term policies.
An ROP individual term life insurance policy can be set up in one of two ways:
As a term life insurance policy with an added ROP rider.
As a return of premium term policy, which doesn't require an additional rider.
Premium: The amount of money an individual or business pays for a life insurance policy.
Rider: Optional, extra terms that go into effect along with your basic policy, often at an additional cost. Riders provide additional coverage and added protection against particular risks and events.
People should also be aware that some fees and costs may be deducted when your ROP pays out. This is why you must always read the fine print to figure out how much money you'll get back when the policy ends.
Return of premium term life insurance plans work much like other term life insurance plans:
ROP life insurance is sold for a set term, usually 10, 20, or 30 years.
You make monthly or annual payments, known as premiums, to keep the policy going.
If you die while the policy is active, the insurer will pay money to the beneficiaries listed on the policy. Remember that higher coverage amounts will cost you more each month in premiums.
If you outlive the policy, all or some of your paid premiums are returned to you at the end of the term.
Let’s say you’re a healthy 25-year-old female in Illinois. You choose an ROP policy for $250,000 for a term of 20 years. You will pay $49.50 per month in premiums.
However, if you decide on a traditional term policy for the same term and amount, it would have cost you a monthly premium of $18.92.
If you die while the policy is still active, all or a portion of your paid premiums are returned to you at the end of the term.
However, if you outlive the policy, your beneficiaries will receive a death benefit of $250,000. In this example, that amount would be a maximum of $11,880.
The idea of growing some savings while paying for life insurance probably sounds like a great option.
Cash value accounts are an additional feature offered on whole life insurance plans, which offer tax and investment benefits to policyholders. If you’d like to learn more about cash value accounts, read our guide to cash value life insurance.
Permanent life insurance policies, however, tend to be expensive. So, you might wonder whether more affordable term life insurance also has a cash value.
The bad news is that term life insurance doesn't offer cash value accounts as a benefit, so when your policy term ends, you don’t receive any money.
However, term life insurance is less expensive than permanent insurance, so due to the savings on premiums, you may end up ahead financially with term coverage despite the lack of a cash value.
Some return of premium life insurance policies also have a cash value component.
However, if you die before the policy runs out, the loan amount is taken out of your refund. Any money you paid on the policy could be lost if you miss a payment or cancel the policy before the term is over.
Most people who qualify for term life can get an ROP policy or ROP rider for their term life insurance.
However, it’s important to remember that each insurance company has rules and regulations that determine whether or not they’ll cover you, such as:
Your risk profile.
If you already have a term life insurance plan, adding an ROP rider is usually straightforward. ROP riders don't typically require medical exams, however, keep in mind that your premiums will go up if you decide to add on to your plan.
Return of Premium Life Insurance is great for some people. However, you have to think about your own finances, goals, and risk tolerance to see if an ROP policy is right for you.
Let’s take a look at some of the benefits and drawbacks to getting a return of premium life insurance.
Few people die during a traditional term life policy period: This makes it hard to justify the cost of a policy if you don't like losing money because you don't get anything in return for the money you spend.
An ROP solves this problem by returning your money if you live longer than the coverage term.
Premiums are paid back tax-free: Money you receive from an ROP term life insurance policy is considered a refund, not an income payment. Therefore, it isn’t taxable.
ROP term life insurance premiums are higher than standard term policies of the same size: Premiums for ROP life insurance can start from anything above 130% of the cost of a policy with no ROP benefit. Be aware of these costs before you sign up.
ROP is not worth it if you're a senior or have a higher risk of dying during the policy term: ROP insurance premiums are higher, so your family's net death benefit is smaller if you die during the policy term.
Because the policy's death benefit is fixed, each additional dollar of premium payments reduces the total value delivered to your family.
No interest: Unlike other savings vehicles, such as 401(k)s or a money market account, the cash you get back from an ROP policy won’t earn interest. If growing your wealth is an important consideration, there might be better alternatives to look at.
A 401(k) plan is a retirement savings plan offered by many American employers that has tax advantages for the saver.
ROP life insurance policies are generally more expensive than other types of term life insurance.
There are two big questions you should consider before you get ROP coverage:
Are the higher premium payments that I’m going to pay on the ROP policy worth the benefits?
Are there other ways that I can use this money to protect my financial assets and family when I die?
If a 25-year-old woman is in good health, she will pay around $50 a month for a 30-year ROP policy with $250,000 coverage.
However, the same woman will pay between $156 and $160 a month, or between $1,793 and $1,839 a year for the same amount of whole life insurance coverage from the same company.
That's roughly three times as much money for the same coverage.
There are various types of term life insurance policies to select instead of ROP life insurance. These policies are typically less expensive and include:
Level term life insurance: This is the cheapest and simplest traditional term life insurance because it pays a specified sum for a certain amount of coverage and period of time. There is one big difference: it doesn't give back your premium payments at the end of the policy's term.
No-medical-exam life insurance: A medical exam is part of most term and permanent life insurance applications. This helps insurance companies calculate the risk of policyholders dying while they are covered by a policy. However, with a no-medical-exam policy, if you meet the policy's requirements, you don't have to go through a medical exam.
Return of premium (ROP) term life insurance is a good option for people who want life cover but also want to get something back after their coverage ends. However, there are other options you should consider if you want to grow your wealth.
If you’re interested in learning about the different life insurance options out there, head to PolicyScout’s life insurance hub. We have loads of articles that will help you understand costs, enrollment options, different plans, and coverage.