Life insurance serves as a crucial financial safety net for your family in the event of your passing. However, the idea of paying premiums for years without ever receiving a payout may not be appealing. Enter return of premium (ROP) term life insurance, which eliminates the possibility of losing your premiums by refunding them if you outlive the policy term. Let’s explore the details and factors to consider before committing to this type of life insurance policy.
What Is Return of Premium Life Insurance?
Return of premium life insurance is typically a type of term life insurance. It involves locking in a rate for a specific term period, such as 10, 20, or 30 years. Unlike traditional term life insurance, if you outlive an ROP policy, the insurer will refund all the premiums you paid.
How Return of Premium Life Insurance Works
With a regular term life insurance policy, you pay premiums throughout the coverage period. If you pass away during that time, your beneficiaries receive a death benefit. However, if you survive the level term period without renewing the policy, there is no payout, and the policy ends.
ROP life insurance allows you to recover all the premiums you paid if you’re still alive when the policy term ends. Typically, ROP life insurance is added as a rider to a regular term life insurance policy, for which you can expect to pay a higher premium.
In the event that you outlive your coverage, 100% of the premiums you paid during the term will be returned to you tax-free. However, failing to make payments or canceling the policy may result in the loss of your premium refund. Specific rules may vary by insurer.
It’s worth noting that some types of permanent life insurance also offer a return of premium feature. For instance, Nationwide provides a return of premium rider on one of its universal life insurance policies.
Life Insurance Policies with Return of Premium
If you’re considering a term life insurance policy with a return of premium option, here are some examples:
- AAA Life Insurance: Available in 15-, 20-, or 30-year terms with coverage starting at $100,000.
- Cincinnati Life: The Termsetter ROP policy offers 20-, 25-, or 30-year level term periods with minimum face amounts starting at $25,000 based on your health classification.
- Country Financial: Available as a rider on 20- and 30-year term life insurance policies.
- Illinois Mutual: Coverage ranges from $50,000 to $500,000, with term options of 20 years, 30 years, or up to age 65.
- Lincoln Financial: Available on TermAccel and LifeElements in 10-, 15-, 20-, and 30-year terms.
- Mutual of Omaha: Available on Term Life Express in 10-, 15-, 20-, and 30-year terms.
- Pacific Life: Available on PL Promise Term in 10-, 15-, 20-, and 30-year terms, and on Pacific Elite Term in 10-, 20-, and 30-year terms.
- Protective: Available on Protective Classic Choice Term policies with term periods ranging from 10 to 40 years.
- State Farm: Coverage starts at $100,000 and is available in 20- or 30-year terms.
Why Get Return of Premium Life Insurance?
The primary reason to consider a return of premium life insurance policy is risk mitigation. If you’re uncomfortable with the idea of potentially outliving a term life policy, the higher cost may be worthwhile for you.
One significant drawback of ROP life insurance is that it essentially provides an interest-free loan to the insurer. Additionally, when factoring in inflation, you end up receiving less money back at the end of the term, as the refund does not include any interest.
A better alternative may be to purchase a traditional term life insurance policy and invest the additional funds you would have spent on an ROP rider in a safe investment account. This approach not only preserves cash but also generates more money by the end of the policy term through modest returns on your investments.
How Much Does Return of Premium Life Insurance Cost?
Term life insurance is usually considered an affordable alternative to more expensive permanent life insurance options like whole life and universal life insurance. However, return of premium term life insurance is typically two to three times more expensive than regular term life insurance, as reported by Policygenius.
FAQs
Q: Is return of premium life insurance worth the higher cost?
A: The answer depends on your personal risk tolerance and financial goals. If you prioritize the return of all your premiums over potential investment gains, ROP life insurance may be worth considering.
Q: Can I cancel my return of premium life insurance policy at any time?
A: You may cancel the policy, but it’s essential to understand the specific rules and potential consequences outlined by your insurer. Cancelling early may result in the loss of your premium refund.
Q: Can I add a return of premium rider to any life insurance policy?
A: Not all life insurance policies offer a return of premium rider. Consult with your insurer or insurance agent to see if this option is available for your desired policy.
Conclusion
Return of premium life insurance provides a unique and reassuring approach to term life insurance. By refunding all the premiums you paid if you outlive the policy term, ROP policies offer a sense of financial security. However, the higher cost and lack of interest on the premium refund are important factors to consider. Ultimately, your risk tolerance and financial objectives will guide your decision.
