Return of premium (ROP) life insurance is a type of term life insurance that provides a unique benefit: if the policyholder outlives the term of the policy, they receive a refund of the premiums paid over the years. This feature makes ROP life insurance an appealing option for people who want life coverage but are concerned about paying premiums for years without seeing any return. In this article, we'll explore how return of premium life insurance works, its benefits, and whether it might be the right choice for you.
What is return of premium life insurance?
Return of premium (ROP) life insurance and traditional term life insurance both provide coverage for a set period, but they differ in how they handle premiums and benefits. Traditional term life insurance offers a death benefit if you pass away during the policy’s term, but if you outlive the term, you receive nothing, and the policy expires. ROP life insurance, on the other hand, works similarly in that it provides a death benefit if you die during the term, but if you outlive the policy, all of the premiums you’ve paid are refunded to you. While ROP policies offer this premium return, they come with higher premiums compared to traditional term life insurance, which typically has lower costs but no refund at the end of the term. There’s also something called a return of premium rider, which functions similarly to ROP policies but is a standalone rider that can be added to an existing traditional life insurance policy.
Pros of Return of Premium Policies
The primary advantage of return of premium (ROP) life insurance is that it provides a safety net for those who outlive the policy term, offering a full refund of the premiums paid. Additionally, ROP policies offer the peace of mind of life insurance coverage with the added benefit of not "wasting" money on premiums if no death benefit is needed.
Cons of Return of Premium Policies
One of the main drawbacks of return of premium (ROP) life insurance is that the premiums are significantly higher than those of traditional term life policies, which may make it less affordable for some individuals. Additionally, while the premiums are refunded if you outlive the policy, the money is essentially locked in for the term length and doesn’t earn any investment returns, meaning the value of the refund could be less than what you paid over time.
Cost Comparison: Return of Premium vs. Traditional Term Life
When comparing the costs of return of premium (ROP) life insurance to traditional term life insurance, ROP policies are typically more expensive due to the added benefit of premium refunds at the end of the term. Premiums for ROP life insurance can be two to three times higher than those of a comparable traditional term life policy. This price increase reflects the cost of guaranteeing a refund if you outlive the policy term.
For example, let’s look at the average cost of a 10-year, $500,000 traditional term policy for a 45-year-old male in excellent health, which costs around $315 a year. This means an ROP policy (at two to three times the cost of a traditional term policy) could cost between $630 to $945 per year for the same coverage and term length.
Is return of premium worth the extra cost?
While ROP life insurance offers the advantage of receiving your premiums back, it may not be the most cost-effective option for those on a tight budget, especially since the refund doesn’t include any interest or growth on the premiums paid. Therefore, individuals should carefully weigh the higher upfront costs of ROP insurance against their budget and long-term financial goals.
SelectQuote Can Help Answer Your Questions About Life Insurance
SelectQuote has 40 years of experience helping people understand the ins and outs of life insurance. If you have questions about return of premium life insurance, traditional term life insurance, or any other type of coverage, we’re here to help. Our licensed insurance agents will take the time to answer your questions and learn about your coverage needs in order to compare policies from dozens of trusted carriers on your behalf.
