Return of premium life insurance (ROP) policies create a boomerang effect for your premium dollars. Your premiums initially are paid to your insurance company to pay your premiums. After your term period expires and you are still alive (like most do) every penny paid in year after year is now added up and returned to you in the form of a nice big tax free check.
If you purchase a return of premium life insurance policy and you die within that time. Your beneficiary will simply be paid the policies face amount otherwise known as the death benefit just as any life insurance policy would. Insurance companies like term insurance because most people outlive the policy and all those premium dollars become pure profit.
Table of Contents
- Return of premium life insurance returns your premiums
- Why do many people outlive their term policy?
- How much life insurance do you really need
- How return of premium life insurance works
- Policy riders you can choose
- Do Return of Premium life insurance policies cost more?
- What carriers offer Return of Premium life insurance?
- What are the cons of purchasing a Return of Premium Policy?
- Comparing the rates of ROP and conventional term life plans
- In Conclusion
Conventional term insurance functions as a “use it or lose it” type product. As most people outlive their term periods, all their premiums become pure profit to their life insurance company. This won’t happen with ROP.
Outliving Your Term Period
Most people outlive the term period of their policies. This is mainly because many consumers love the lower premiums of the shorter term periods such as 5, 10 and 15 years. Most people need longer term periods than these. Years later their policy terminates and they still need life insurance. This becomes a very profitable scenario for life insurance companies. The statistics show that over 70% of the term policies terminate while the insured is still alive and well. This creates a huge profit for the companies. Return of premium policies can put your hard earned dollars right back into your checkbook.
Most of the time it is because they just don’t know and plan out their life insurance program. Also, it can commonly be used as a sales promotion for unethical insurance agents. Some of these agents know less than their clients and the others promote the cheap price of the shorter term period policy designs. They would rather have a sure sale promoting a cheap price than recommending their client apply for what they actually need.
Financial planners are very good for this with their substandard advice. The financial planners are concerned about their own financial success and not their clients.
This is a very important question that you have to give a lot of serious consideration to. Being over insured will only cost you higher premiums and being under insured will not give your dependents the protection they need. Most good financial experts recommend 7 to 10 times their annual income. Probably 90% of the time, the chosen face amount will depend on what the applicant can afford and not with statistics that are not realistic in the real world.
I always recommend to only buy what you can comfortably afford so the monthly premium easily fits your budget. The last problem you want is to have your life insurance portfolio become a financial burden and you have to leave it lapse.
This is very simple and extremely easy to understand. Purchasing a return of premium life insurance policy (also known as ROP). Gives you the advantage of not losing all your hard-earned premium dollars if you outlive your term period. When you purchase these policies, you are actually purchasing a rider which is added on to the standard base policy. If you own a ROP policy and you outlive the policies term period, you get all your paid in premiums back including the cost of the rider itself.
A return of premium life insurance policy already implements one riders from the very beginning. This is simply called the return of premium rider which changes the functionality of the term policy it is incorporated into. There are a number of other riders you can also include on your new policy such as:
Waiver of premium rider
This is also referred to a disability waiver of premium rider also. In the possible event that you become disabled to the point where you cannot work and ultimately lose your income as a final result. This disability rider will allow you to stop paying your premiums until you finally recover without the possibility of your policy lapsing due to non-payment of premiums. Keep in mind that this type of a rider along with a number of others will increase your premiums.
Disability income rider
This is also another disability related rider that will provide you with monthly income payments. This is to replace your recently lost income due to being disabled from you not being able to work. This works in the very same way as disability income insurance policy. It can be easily added on to your return of premium life insurance policy as an additional benefit.
Acceleration of death benefit rider
This option is normally free and built into most good term life insurance policies. If you ever become terminally ill, this rider will trigger a cash benefit if so you can use it for expenses such as medical care costs from your illness. This usually means being diagnosed with a terminal illness giving you 12 months to live. This number can sometimes be as high as 24 months with certain states in the US.
These policy designs do cost more simply because you have the opportunity for the return of every dollar you paid in. In many cases, these type of policies can cost close to twice as much as conventional term policies. If you are relatively young and reasonably healthy, the odds are definitely in your favor for outliving your policies term period. If you purchase you ROP life insurance at a relatively young age, your premiums will be very affordable. Keep in mind that specific conditions can affect your premiums just as with all life insurance policies such as:
Your age always plays a huge part in determining your premium. The older you are when you apply, the higher the premium will be.
Your current health is one of the most important factors the life insurance companies consider. The more medical issues you have, the more likely your rates will either go up or you could even be declined.
If you have a hazardous job, your rates can be affected. Dangerous jobs such as Iron Workers, Commercial Fisherman and Pilots just to name a few can increase your rates.
If you have poor credit, your rates can be affected. Historically the statistics show that people with poor credit rating are more likely to trigger insurance claims.
Your driving record clearly reveals your respect for the law and your degree of responsibility. People with poor driving records are more likely to have an auto accident which can result in a fatality.
Your Family Health History
A history of cancer, heart disease and early death (before age 50) can cause your rates to increase. This pertains to your parents and siblings. These medical concerns can be passed down in your genes.
Policy Face Amounts
The larger policy death benefit you choose, the more expensive your policy will be. The longer the term period you choose will also increase your premiums.
If you use tobacco products especially smoke cigarettes, your rates will go up. Cigarette smokers usually pay about 300% more money in premiums.
Not all do, but there are several top rated carriers that offer these plan designs. ROP policies can be purchased with a minimum term period of normally 10, 15, 20 and a maximum of 30 years. The companies with the most competitive rates are usually:
- Cincinnati Life
- Assurity Life
- AIG American General
- Mutual of Omaha
Cincinnati Life, Assurity Life and Mutual of Omaha usually has some of the lowest premiums but not in every case. Some of the other life insurance companies do not offer these policies because the profitability statistics are not as good as standard term insurance. In this case, they may have to pay out in two different ways.
Either by a death claim or by the insured outliving the policy and then returning all the premiums back to the owner of the policy. Some life insurance companies don’t appreciate the statistics they are faced with return of premium life insurance.
Some people may not always be able to afford the extra cost of these plans designs. If you die before the policy reaches its final term period. Your beneficiary will simply receive the designated face amount (death benefit) just like any other policy. They will not receive the additional cost of having the ROP rider.
A lot comes down to the value you place on paying out more money in premiums initially. But having the advantage to receive all your premiums back in the end.
The bottom line is if you can afford the additional premium cost. The return of premium life insurance policies can work out well for you. When a conventional term life policy terminates, you receive nothing back whatsoever.
The insurance companies that sell return of premium life insurance policies do not advertise them too much because it is very likely they will be reimbursing their clients premiums back one day.
If you complete the form on the right or our instant life insurance quoting tool, you will see a drop-down menu choice for 15, 20, 25 and 30-year return of premium plan designs. You can see just how the cost factor differs from standard term plans. Getting all your premiums back at the end of the term period is a great idea, but it does come at an additional cost.
Check and see if these plans fit your budget. If so, you may be able to receive a nice check in the mail someday instead of simply paying out premiums with nothing to show for it in return.The statistics are in your favor!
Is the extra cost of ROP life insurance worth it?
Whether or not a return of premium life insurance policy is worth it to you will depend on your specific financial situation. Receiving a check with no income tax liabilities would be very nice to say the least especially if you are at retirement age.
But you have to take into consideration you are actually getting back money you already paid into the policy. The money was yours to begin with. But at least your life was insured for that term period and you will recover all your premiums back.
Return of Premium life insurance is not always the best choice for everyone. Life insurance is definitely not a one size fits all product. Take your time and get to understand the many types of policy designs available to you.
We are always here to answer any of your questions and helping you select the best policy for your specific needs and budget. Feel free to call us 7 days a week. We are always here to help you. You can also read our getting started article for more helpful information.
All the best,
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