What is a Return of Premium Life Insurance Policy?
A Return of Premium (ROP) life insurance policy guarantees a full or partial refund of the premiums you pay if you outlive the stated term of the policy. This feature is typically added as a rider to a traditional term life policy that has a 20- or 30- year term. Some ROP policies return only the base premium payments to the policyholder but not the additional cost for the ROP rider, while others return the full cost.
In order to generate enough income to pay any ROP refunds that come due, life insurance companies invest a portion of the premiums you pay, but the money you get back will not include any interest earnings.
Some universal guaranteed life insurance policies also offer a return of premium option that lets you surrender the policy in exchange for getting back the premiums you’ve paid up to that point. The key difference is that with ROP term life insurance, the refund generally only becomes available when the term expires.
How Does Return of Premium Life Insurance Work?
Reasons You Might Want ROP Life Insurance
Low risk tolerance
If you have a high aversion to financial risk, then an ROP policy might be a reasonable option to consider. Perhaps the prospect of putting thousands of dollars into a life insurance policy that never pays out because you’re still around when the policy expires doesn’t sit well with you. You might also worry that the money you spend on life insurance will leave you with fewer funds available for things like retirement savings and medical needs if you outlive your policy’s term. With a return of premium policy, you can recoup at least some of that money if the policy expires before you do, whereas with traditional term life insurance, you get nothing back.
Longevity in your genes
Another incentive for purchasing ROP life insurance might be if you have a better than average chance of living longer than the 20 or 30 years of your policy’s term. Maybe you’re in better physical shape than most people in your age bracket and geographic location, or you have several centenarians in your family tree. In that case, you might be concerned that the blessing of longevity could backfire unless you have a backup plan for your insurance policy.
High earner, poor saver
Let’s say you have a good income, but you’re a lot better at spending the money you earn than saving it. Choosing the ROP option when you buy life insurance will at least guarantee that, if the policy goes unused because you don’t die before the coverage ends, you’ll at least have some money set aside to pay for your living expenses.
An ideal candidate for ROP insurance might be someone with low risk tolerance, a high risk of outliving their term policy and a high enough income to absorb the extra premium cost without sacrificing other financial needs.
What is the Average Cost of ROP Life Insurance?
An ROP rider will typically add about 30% more than the cost of a basic term life policy to your monthly premium. A key reason for their higher cost is the limited supply of ROP policies: Fewer life insurance companies offer them than the traditional term life policies. While ROP life insurance is significantly higher than traditional term life insurance, it is still less expensive than permanent versions like whole or universal life.
Just as with the base portion of your premiums, your ROP premium cost will depend a lot on the amount of coverage you’re purchasing, as well as your age and health status when the coverage begins.
Let’s say you’re a generally healthy, non-smoking 65-year old buying $250,000 worth of term life coverage. If you’re a man, you might expect to pay an extra $55 a month for the ROP option, $50 more if you’re a woman, according to the financial technology company SmartAsset. If you’re in your early to mid-70s when you purchase the policy, add another $5 a month to those estimates.
Is a Return of Premium Term Life Insurance Policy Worth It?
The value of an ROP policy largely depends on you winning the bet that you will outlive the policy. If you die at any time while a term life policy is in effect, your highest return for your money will always come from buying the less expensive traditional coverage and investing the difference in the cost. But since you generally can’t predict either the time of your own death or the exact rate of return on your investments, it can be worthwhile to look at the pros and cons of ROP insurance to see whether the option makes sense for you.
Pros:
- Premium refund. The biggest advantage of an ROP life insurance policy is getting your money back from the premiums you’ve paid. For instance, if you buy a 30-year life term insurance policy that costs $50 a month, you’ll get that $18,000 back if the policy expires before you die. If the insurance company provides a refund of both the base premium and the additional payment for the ROP rider, your net cost ends up being zero.
- Forced savings vehicle. If you struggle with the discipline it takes to save money, an ROP insurance policy is one way to let someone else – the insurance provider – do it for you. You get life insurance coverage for a limited time, with the bonus of getting back all or part of the money that was set aside for your death benefit if it’s not paid out.
- Guaranteed return. If you have a low tolerance for financial risk, you might find the promise of a guaranteed return from the purchase of a return of premium policy more appealing than investing the money in the stock market.
- Tax free. You won’t have to pay taxes on the refund you receive for outlasting your ROP insurance policy.
- Cash value. Some ROP policies apply a portion of your premiums to a cash account from which you can take out loans or make withdrawals. If you don’t repay the money before the policy’s term ends, the insurance company subtracts the amount from your refund or your beneficiary’s death benefit.
Cons:
- Higher price. The prospect of paying an additional 30% or more for the cost of your life insurance policy may be a deal breaker for you if you think that money would be better spent elsewhere, or you simply can’t afford the increase.
- No interest earned. The main drawback to using an ROP life insurance policy as a “safe” savings vehicle is that you lose out on the chance to grow that money in an interest-earning account. Unlike parking the money in a certificate of deposit, money market account or even a regular savings account, you won’t get any more money back from an ROP policy than what you put into it – and in some cases, you’ll receive less. You may come out better by purchasing a traditional term life policy and investing the difference in the cost.
- Risk of getting nothing. Check the fine print, because with some return of premium policies you forfeit all refunds if you cancel the policy before its term ends or fall behind with your premium payments. Even insurance companies that allow partial refunds on cancelled ROP policies will usually also impose a penalty fee for the cancellation.
- Minimum coverage requirements. Some life insurance companies impose a minimum coverage amount or term length for the purchase of an ROP rider.
How to Choose the Best ROP Life Insurance
To determine which ROP life insurance policy is the best deal for you, you’ll want to compare the monthly cost increase for getting an ROP rider on policies that carry the same amount of coverage. You also should weigh each policy’s total return by looking at the cost of the ROP option versus the guaranteed refund amount.
For each plan you’re considering, conduct an opportunity cost analysis. Add up the amount you would pay in premiums and the guaranteed amount you would get back if you outlived the policy. Then estimate the results of alternative scenarios in which you would put that money in other savings or investment accounts.
With any term life insurance policy, there is always at least some chance that your coverage will end before you die, leaving you with nothing to show for all the premiums you pay over those decades. And unless you put more money into a new policy, your loved ones will get no financial benefit when you finally do pass on. A term life policy with an ROP rider is one way to ensure that you get something in return for the cost of that unused life insurance besides peace of mind.
Buying ROP life insurance is one of several ways to obtain a cash benefit from a life insurance policy. You may also be eligible to receive a lump cash sum by selling your life insurance policy through a life settlement. To learn more about this process and receive a FREE cash estimate on the value of your policy, contact Harbor Life Settlements today.
