Return of premium (ROP) life insurance is a type of term life insurance that offers a unique benefit to policyholders. Unlike traditional term life insurance, which does not offer any premium refunds if the policyholder outlives the term, ROP life insurance provides a refund of the premiums paid if the policyholder survives the policy term.
This feature can make ROP life insurance a more attractive option for those who want to ensure that their premium payments are not lost if they outlive the policy term.
With ROP life insurance, policyholders can lock in a fixed rate for a specified period, such as 10, 20, or 30 years. During this term, the policyholder pays a regular premium, and the insurance company provides a death benefit to the beneficiaries if the policyholder passes away during the term.
However, if the policyholder outlives the term, the insurance company will refund the premiums paid, providing a potential financial benefit to the policyholder. This feature can make ROP life insurance a more flexible and rewarding option for those seeking long-term life insurance coverage.
How Does It Work?
In a standard-term life insurance policy, individuals make regular premium payments while their coverage is active. Should the policyholder pass away during this period, their beneficiaries are entitled to receive a death benefit payout.
However, if the policyholder remains alive at the conclusion of the level term period and does not renew the policy, no payout is issued, and the policy terminates.
Return of premium (ROP) life insurance provides the opportunity for policyholders to receive a refund of their monthly premiums if they survive the policy term. Typically offered as an additional rider to a standard term life insurance policy, ROP coverage often comes at a higher cost.
If the policyholder outlives the coverage term, they can expect to receive a tax-free refund of all premiums paid during that period. It is important to note that failure to keep up with premium payments or the cancellation of the policy may result in the policyholder not being eligible for a premium refund, with specific rules varying among insurers.
Some permanent life insurance policies also offer a return of premium feature. For instance, Nationwide includes a return of premium rider on certain universal life insurance policies, providing policyholders with the opportunity to receive a refund of premiums under specific conditions.
Life Insurance Policies With Return of Premium
Here are some examples of term life insurance policies that offer a return of premium option:
- AAA Life Insurance provides coverage for 15, 20, or 30 years with a minimum coverage amount of $100,000.
- Cincinnati Life’s Termsetter ROP policy is available for level terms of 20, 25, or 30 years, with minimum face amounts starting at $25,000 based on health classification.
- Country Financial offers a return of premium rider on their 20- and 30-year term life insurance policies.
- Illinois Mutual provides coverage ranging from $50,000 to $500,000 with terms of 20, 30 years, or to age 65.
- Lincoln Financial offers the return of premium option on their TermAccel and LifeElements policies in 10, 15, 20, and 30-year terms.
- Mutual of Omaha’s Term Life Express policy offers a return of premium option in 10, 15, 20, and 30-year terms.
- Pacific Life provides the return of premium options on their PL Promise Term in 10, 15, 20, and 30-year terms and Pacific Elite Term in 10, 20, and 30-year terms.
- Protective offers the return of premium features on their Protective Classic Choice Term policies for term periods ranging from 10 to 40 years.
- State Farm’s return of premium option is available on their term life insurance policies with a coverage amount starting at $100,000 and terms of 20 or 30 years.
Why Get Return of Premium Life Insurance?
The primary motivation to purchase a return of premium life insurance policy is to mitigate the risk of outliving a term life policy. Although the cost is higher, it may be a worthwhile investment for those who are uncomfortable with the idea of outliving their policy.
However, it’s important to note that the refund amount does not include any interest, and if inflation is factored in, the actual amount received at the end of the term may be less than the premiums paid.
One significant drawback of ROP life insurance is that it essentially involves providing an interest-free loan to the insurer.
A potentially better alternative may be to buy a traditional term life insurance policy and invest the extra funds that would have been paid towards an ROP rider in a safe investment account. This approach not only preserves some cash but also has the potential to earn modest returns, resulting in more money by the end of the policy term.
What is the Cost of Return of Premium Life Insurance?
Term life insurance is often seen as a cost-effective choice compared to permanent life insurance. However, ROP term life insurance is notably pricier, typically costing two to three times more than standard term policies. This higher cost stems from the feature that refunds premiums if the policyholder outlives the term.
While ROP offers a potential refund, it lacks interest and may result in less money due to inflation. Alternatively, investing the additional ROP premium in a safe account can yield returns, potentially resulting in more funds at the end of the policy term. This strategy allows for potential growth and financial flexibility beyond what ROP term life insurance offers.
FAQs
Is ROP life insurance taxable?
Return of premium life insurance is not taxable, as any premiums returned are considered a refund and not subject to taxes.
What is the cash value of return of premium life insurance?
ROP life insurance does have a cash value, providing a potential return of all premiums paid if the policyholder outlives the term.
What happens when you cancel your ROP life insurance?
If you cancel your return of premium life insurance, your coverage ends, and beneficiaries won’t receive a death benefit. Premiums paid may not be recoverable unless specified in the policy.
How much does return of premium life insurance cost compared to regular term life insurance?
ROP life insurance is typically two to three times more expensive than regular term life insurance, making it a pricier option.
