Return of premium life insurance definition
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Updated 12:35 p.m. UTC Sep. 27, 2023
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Key points
- Return of premium life insurance can pay you back if you outlive your term life policy.
- Opting for return of premium coverage could mean paying a higher rate for life insurance.
- Allowing your policy to lapse could result in losing any return of premium benefit.
Life insurance offers a simple way to provide financial support to your loved ones when you die. But what if you outlive your policy? That would be a good problem to have, but it could mean paying for 10, 20 or more years of life insurance you’ll never use. Fortunately, there are life insurance products designed to make unused policies more palatable.
Here’s everything you need to know about return of premium life insurance, including what it is, why you may (or may not) want to consider it and how to shop for a policy.
Ethos
What is return of premium life insurance?
Return of premium (ROP) life insurance is a type of life insurance or policy rider that pays you back your insurance premiums if you outlive the policy, as long as certain conditions are met.
ROP life insurance is typically structured as a term life insurance policy, meaning you pick a period of time, such as 10, 20 or 30 years, for which you want to lock in your rate and coverage. Once the term of your ROP life insurance ends, coverage expires and your insurer will issue you payment for the premiums you put toward the policy. Then you can either renew the policy or purchase a new one.
How does return of premium life insurance work?
Return of premium life insurance works similarly to other types of life insurance, except that you’ll receive a premium payout if you outlive the policy. You can purchase a return of premium life insurance policy as a stand-alone product, much like you would term or whole life insurance, or you can add it to an existing policy as a rider, or add-on feature.
Though ROP coverage is occasionally available for permanent life insurance products, it’s usually sold as a term life insurance product. When you purchase a policy, you’ll need to choose a term, such as 10, 20 or 30 years, as well as a coverage amount, or death benefit. If you’re alive when the policy term ends, you will receive a lump-sum payout for the premiums.
An ROP policy is usually more expensive than a standard term life insurance policy, but you could think of it as a forced savings vehicle.
Sure, you’re paying premiums each month under the assumption that benefits might need to be paid out to your loved ones before the term is up. But if not, you can walk away with a lump sum of cash you could use to pay off your mortgage, put your kids through college or meet other financial goals.
Pros and cons of return of premium life insurance
If you’re considering ROP life insurance, weighing the pros and cons can help you decide if the higher rates are worth the benefits.
| PROS | CONS |
|---|---|
All the money you paid in premiums during the term is returned to you if you outlive your policy
| More expensive than a standard life insurance policy
|
The money returned to you is tax-free
| Missed premium payments could lead to a policy lapse
|
This money can be used to purchase a new life insurance policy in full or meet other financial goals you may have
| Can’t access premiums until your policy term ends
|
Pros
Return of premium life insurance offers an obvious benefit, in the form of premiums paid back to you. You’re not taxed on the return of premiums, since you’re simply getting back the money you paid to the insurance company.
That could be an advantage if you have other goals you’d like to apply those funds to. But what if you need to keep your insurance once the term ends?
You could purchase a paid-up life insurance policy for a lesser amount at the end of the term, without having to go through a health exam, said Daniel Adams, a licensed independent insurance agent and president of CEG Life Insurance Services in Kirkland, Washington.
Any premiums paid could be transferred tax-free toward a new, permanent policy. Having that kind of flexibility could make a return of premium policy more attractive than regular term life coverage.
You can also put the returned premiums toward other financial obligations or goals, such as paying off your house, putting a child through school or building an inheritance.
Cons
Perhaps the biggest disadvantage of return of premium life insurance is the cost.
“You’ll pay a higher premium than you would for a standard term life insurance policy with the same death benefit amount,” said Adams. Of course, if you were to choose standard term life coverage and outlive it, you’d be out the premiums paid.
There are some other stipulations, aside from cost, that could make return of premium life insurance problematic. Canceling your policy may mean forfeiting your right to have any premiums paid returned. Likewise, allowing your policy to lapse could result in the loss of your return of premium benefits.
Kevin Draeger, a certified financial planner and life insurance product manager at Country Financial said critics of return of premium life insurance are often quick to point out the additional premium paid might be better put to use if invested elsewhere. And that may be true, depending on the rate of return you’re able to get with your investments.
It’s also important to note that while some see this as “forced savings,” you can’t actually tap into the money until the policy term ends. So those funds won’t be available in an emergency or if you want to make a significant purchase, such as a home.
How much will you pay for return of premium life insurance?
The amount you’ll pay for the return of premium life insurance will depend on a number of factors, including your age, gender and health. Your choice of insurance companies and coverage amount will also affect your rates.
If you’re considering ROP life insurance, be prepared for high rates. The best way to find out how much you’ll pay is to get multiple life insurance quotes, but the following examples can give a general idea:
- State Farm offers 20-year term life insurance rates starting at $175 annually for a healthy 25-year-old female in excellent health living in Illinois. Meanwhile, a 20-year return of premium life insurance policy with the same coverage would cost $677.50 — over $500 more per year.
- Illinois Mutual offers a $250,000 20-year ROP policy for a 28-year-old healthy female for around $509 per year.
How to choose the best ROP policy
Choosing the right ROP policy comes down to knowing how much coverage you need and how much you can realistically afford to pay.
Draeger advises asking these two questions when comparing return of premium options from different insurers:
- How much will be returned and is it guaranteed? Some insurers pay your premiums back to you, minus any policy fees. Others return a different premium amount, so it’s important to know exactly what you stand to get back.
- What options are available at the end of the policy? You may have the option to convert your policy to permanent life insurance at the end of the term or continue coverage with no premiums using a reduced paid-up option. It’s helpful to know what you might be able to do with the policy should you decide to keep it.
Comparing rate quotes online can help you gauge what you might pay for coverage for different terms and coverage amounts. Working with an insurance agent who is knowledgeable about ROP life insurance can help you sift through the policy details and choose the best option.
Alternatives to a return of premium policy
Return of premium life insurance isn’t your only option. You can also choose from standard life insurance policies.
- Term life insurance offers coverage for a set number of years, during which your rates and coverage are locked in.
- Whole life insurance is a type of permanent life insurance that lasts a lifetime and usually accumulates a cash value at a fixed rate of return. It also offers a guaranteed death benefit and fixed premium payments.
- Universal life insurance is another form of permanent coverage that includes a cash value. This type of policy often offers flexible premiums and death benefits.
Consider your coverage options: Types of life insurance.
Frequently asked questions (FAQs)
If you cancel your return of premium life insurance, your coverage will end. Your beneficiaries won’t be able to collect a death benefit when you pass away. And you may be unable to recover any premiums paid into the policy up to the cancellation date, unless your policy specifies otherwise. Always talk to your insurer before canceling your policy.
Return of premium life insurance is generally more expensive than standard term life insurance. The same can be true for some types of permanent life insurance, like whole life or variable life insurance. Getting life insurance quotes for different types of policies can help you find coverage that’s affordable and suited to your needs.
If you want the peace of mind of knowing you’ll receive your premium payments back if you outlive your coverage, a return of premium policy may be worth it to you. However, you may also consider investing the extra cost in other ways, such as in a high-yield savings account or different types of IRAs.
Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.
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