With regular term life insurance, you lock in a level rate with a period of time that might be 10, 20 or 30 years. When the term is over, you can usually renew the policy annually but at higher rates. Your beneficiaries receive a payout if you die when the policy is in force. However, if you are alive at the end of the policy, no payout takes place.
With ROP insurance, you can get those monthly premiums back if you’re still living when the policy term expires. Some companies allow you to add or purchase ROP life insurance coverage and integrate it into an existing policy in the form of a return of premium rider. The catch is that ROP insurance is more expensive in exchange for receiving that payback benefit.
When you outlive the term, with ROP life insurance, you get up to 100% of your premiums returned to you tax-free, minus administrative fees and related charges. You may not get a premium refund if you missed one or more premium payments or cancel the policy. That said, insurers have different rules, so this may vary by provider.
The other benefit is that the ROP life insurance builds cash value over time, which is not normally true for term life policies. With enough cash value, policyholders can borrow against the policy, withdraw money or surrender the policy for cash if coverage is no longer needed.
Who Should Get ROP Life Insurance?
ROP life insurance offers some attractive benefits for policyholders, but there are some drawbacks as well. Here are some pros and cons to consider.
Pros
- ROP policies are the equivalent of a forced savings option if your premiums are returned.
- Premiums are refunded in as little as 10 years depending on the length of the policy term.
- Refunded premiums are not taxable.
- May cost less than whole life insurance and other types of permanent life insurance.
Cons
- Policies are more expensive than a basic term life insurance policy.
- Additional premium costs are usually better invested or saved elsewhere with vehicles that offer higher returns and lower fees, such as an IRA account.
- The value of the premiums you are refunded is depreciated due to inflation.
- Many insurers don’t offer an ROP rider, so finding the right policy may be more challenging.
What Will I Receive as a Refund From My Term Life Insurance Premiums?
The exact amount you receive from your return of premium life insurance policy varies by insurer, but typically it can be as much as 100% of the policy premiums minus administrative charges, late payment fees or similar costs. The percentage amount may vary by provider.
