What Is Return of Premium Life Insurance?
Return of Premium Life Insurance Explained
Return of premium life insurance is a type of life insurance that will refund what you’ve paid in premiums, if you outlive the time limits of your policy. It is a form of term life insurance.
Learn how return of premium life insurance works and what you can expect to pay for it. It may be helpful to know the pros and cons of this option, as well as what other alternatives exist.
What Is Return of Premium Life Insurance?
Return of premium life insurance is a type of term life insurance, available either as a standalone product or as an add-on to your policy, also known as a rider. Term life insurance usually provides a cash payment (known as a death benefit) if you die within the specific time period that your policy premium (payment) covers—say 10, 15, 20, or 30 years.
Usually, if you don’t die within that period of time, your coverage and payment ends. It’s like renting an apartment—you don’t get a refund.
Return of premium differs, as this type of policy returns 100% of the premiums you paid, if you outlive the policy term. In the event you do die before the term is up, your beneficiaries will still receive the death benefit. It’s more like rent-to-own, although you’ll pay extra for the opportunity to do so.
- Alternate name: Adjustable Premium Level Term Life Insurance, Return of Premium Rider
- Acronym: ROP life insurance
Tip: You may want to consider return of premium life insurance if you have a low risk tolerance and money to afford the additional premiums.
How Does Return of Premium Life Insurance Work?
Return of premium life insurance is typically offered for set term, often up to 30 years. You’ll make monthly or annual payments to keep the policy active. If you pass away while your policy is active, the death benefit will be paid to whoever you named as the beneficiary (recipient) on the policy.
If you outlive the term, you’ll receive a tax-free refund of all the premiums you’ve paid over the course of the policy. During the term, you can borrow against the amount you’ve built up, although interest will be charged on the loan and the loan amount reduces your death benefit. If you want to cancel early, you may not get back the full amount.
For example, if you paid $60 per month for a 15-year return of premium life insurance policy and are still alive after the 15 years is up, the $10,800 you spent may come back to you. You can use this money in any way you wish.
Average Cost of Return of Premium Life Insurance
If you opt for a return of premium life insurance policy, you can expect it to pay more than you would for a traditional term life insurance–up to 30% more—as the insurer wishes to recoup the costs of your premium refund.
The selected term, your age, whether you smoke, your health, and the individual insurer all play a role in the cost of your ROP policy. State Farm, for example, charges $49.59 monthly or $570 annually for $250,000 worth of coverage over 20 years. However, that’s only if you’re in excellent health and are a 25-year-old female—your rates could be vastly higher depending on your age and health condition.
If you’re not good at saving money, a return of premium life insurance policy can help you do so. Instead of spending the cash or allocating it toward riskier stocks or other investments, you’ll receive a guaranteed amount back, as long as you maintain your side of the agreement and outlive the policy.
Tip: Ask the sales agent whether your final guaranteed return of premium outpaces, or at least keeps up with, the annual inflation rate of about 2%.
However, return of premium life insurance policies don’t earn interest. Also, they aren’t easy to cancel in order to retrieve your premiums—which means you lose any advantage over traditional term.
If you purchased term insurance and then allocated the additional 30% you would’ve spent on an ROP policy into investments within a tax-advantaged Roth IRA, you could potentially earn a much higher return, although risks are involved, too.
Pros and Cons of Return of Premium Life Insurance
Potential for a premium refund
More expensive than a traditional term life insurance policy
Difficult to cancel without losing premiums paid
Return may not keep up with inflation or outperform other options, like investments
Alternatives to Return of Premium Life Insurance
If you decide that return of premium life insurance isn’t a good fit for you, here are some other options to look into.
- Term life insurance: Traditional term life insurance may be a smarter choice if you’d like coverage for a set time period with low premium payments.
- Whole life insurance: Like return of premium, whole life insurance builds cash value and provides a death benefit. However, it can be more complex and is intended for lifelong coverage—also known as permanent insurance. If you want to renew your return of premium, you may be able to do so, such as by converting it to a permanent policy.
Traditional Term vs. Return of Premium Life Insurance
|Term||Return of Premium|
|Only pays if you die during the policy’s term||If you’re alive once your term is up, you’ll recover premiums spent on your policy|
|Premiums are typically affordable, especially if you’re young and in good health||You’ll spend more money on your premiums in return for benefit of a potential premium refund|
- A return of premium life insurance policy allows you to collect your paid premiums if you don’t pass away before the end of its term.
- Return of premium life insurance costs more than traditional term life insurance, making it important to determine if the benefits outweigh the higher price tag.
- Return of premium insurance carries risks if you think you might possibly cancel the policy or need to take a loan from the policy. However, it may be less risky than other options involving investments.
State Farm. "Protection and Cash Back — That's a Return of Premium Term Life Insurance Policy." Accessed Sept. 23, 2020.