An insurance policy is an essential tool for ensuring that you don’t suffer financial hardship when a loss occurs. But, unlike clothes that don’t fit, an insurance policy doesn’t come with a return policy. It’s not a product you can return to get your money back.
However, among the various types of life insurance, return of premium life insurance breaks out of that conventional norm. With this policy, you’ll receive a refund of all the premiums you paid in the event that you are still alive when the policy term lapses. This post will take a closer look at what a return of policy life insurance is and how it works.
Defining Return of Premium Life Insurance
Also known as ROP, the return of premium life insurance policy refunds all the money a policyholder paid if they outlive the policy term.
Just like with the standard term life insurance policy, the death benefit will be paid out to the beneficiaries of a policyholder in the event that they die before the policy period lapses.
How Does Return of Premium Life Insurance Work?
A return of premium life insurance policy can either be sold as a life insurance rider that’s added to a standard policy or as a standalone policy. When purchasing this policy, you can choose a term length like 10, 20, or 30 years.
With a typical term life insurance, if you’re still alive when the policy lapses, you get nothing. If you outlive a return of premium life insurance policy, you’re going to get back the exact amount you paid. Also, the money won’t be taxed, given that it’s simply a refund of the premiums you paid.
But there’s a catch, the return of premium life insurance attracts higher premiums compared to standard life insurance policies.
As an example, let us look at a hypothetical scenario in which a 40-year-old man has a choice between a return of premium life insurance policy and a term life insurance plan. Suppose the 40-year-old man opts to buy a $500,000 term insurance policy with a 30-year term. The monthly premium could be $43. The total annual premium would be $516.
If the same man opted for a $500,000 return of premium life insurance policy with a 30-year term, the monthly premiums could be as high as $90. This would total $1080 annually.
As depicted above, you’ll pay higher premiums if you opt for an ROP policy than you would if you opted for a standard life insurance policy.
Advantages and Disadvantages of Return of Premium Life Insurance
As appealing as getting back your premium payment seems, an ROP policy has drawbacks as well. Here’s an outline of the advantages and disadvantages of ROP.
Advantages
- You get all your premiums back in the event that you are still alive when your policy’s term ends.
- The premium refund isn’t taxable. It’s not an income but simply a refund of the payments you made.
Disadvantages
- There is no interest in the returned premiums.
- It’s more expensive than standard life insurance.
- Most insurance companies still don’t sell ROP policies.
Other things that you need to keep in mind about the return of premium life insurance include:
- Suppose you terminate the policy before it lapses—or simply stop paying premiums—you may not get money back, depending on the policy.
- Some insurers add their own twists to ROP policies, so it’s important to take a close look at the details of the coverage before you purchase it.
- There’s a chance that you may be able to convert an ROP policy into a permanent one without a medical exam.
- You may receive less money than you expected. For instance, the insurer might deduct one-time fees paid at the beginning of the coverage.
Is Buying a Return of Premium Life Insurance Policy Worth It?
A regular life insurance policy may be all you need. The additional money that you’re spending on ROP policies can be put into an interest-bearing savings account. Or use it for something else. If you invest wisely, you may end up earning more money than the amount you would have received as a refund on your ROP policy.
That said, if you want to guarantee that you get all your premiums back when your policy terms lapse, you need to ensure that you don’t cancel your policy and make all payments on time. Otherwise, the ROP policy may not pay at the end of its term.
Learn More About ROP Life Insurance
If you want your money back and are willing to pay higher premiums, then the ROP policy is a good fit for you. But if you opt for a medically underwritten term life insurance policy, there are many options to choose from.
That said, life insurance risks often come unannounced. But you can avoid surprises by ensuring that your insurance policies are up to date. Visit our blog to learn more about different types of insurance.
Are you looking to secure your family’s future? Life insurance coverage from Autumn Insurance can ease your burdens by helping ensure that your family is financially secure even in your absence.
Autumn’s team of independent insurance agents works with many carriers to find the best coverage and rates. Then we stand with you, reviewing your policy needs as they evolve. Contact us for fast and free analysis.