In short, Return of Premium Term Life Insurance is a term policy that simply returns all your premiums if you don’t die before the term period ends. Return of premium term life insurance (ROP) policies create a boomerang effect for your premium dollars. First, your premiums are initially paid to your insurance company to pay your premiums. Then, after your term period expires and you are still alive (like most do), every penny you paid over the years is returned to you in a nice big tax-free check.
If you purchase a return of premium life insurance policy and die within that term period, your beneficiary will be paid the policy’s death benefit, just as any life insurance policy would. Insurance companies like term insurance because most people outlive the policy, and premium dollars become pure profit.
Table of Contents
- What is Return of Premium Life Insurance?
- Why Do So Many People Outlive Their Term Policy?
- How Much Life Insurance Do I Need?
- How Does Return of Premium Life Insurance Work?
- What Kind of Policy Riders Can I Choose?
- Do the Return of Premium Policies Cost More?
- What Carriers Offer Return of Premium Life Insurance?
- Are There Downsides to R.O. P. Policies?
- How Can I Compare Rates for Return of Premium Policies?
- Example of How These Policies Can be Beneficial
- In Conclusion
Conventional term insurance functions as a “use it or lose it” type product. As most people outlive their term periods, their premiums become pure profit to their life insurance company. This cannot happen with ROP.
Most people apply for too short of a term policy over 70% of the time.
Most people outlive the term period of their policies. This is mainly because many consumers love the lower premiums of the shorter 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 perfect 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.
They just don’t know and plan their life insurance program most of the time. Also, it can commonly be used as a sales promotion for unethical financial planners. Some of these so-called Certified Financial Planners know less than their clients and promote the low price of the shorter term period policy designs to make an easier sale. They would rather have a sure sale promoting a low price than recommend their client apply for what they really need.
Financial planners are very good at this with their poor advice. Most financial planners are concerned about their financial success and not their clients. The independent insurance agents are fiduciaries that protect their client’s best interests and know better than to do this.
This is a very important question that you have to give a lot of serious consideration to. Being overinsured will only cost you higher premiums and being underinsured will not give your dependents the protection they need. Most good financial experts recommend 7 to 10 times their annual income. So probably 90% of the time, the chosen face amount will depend on what the applicant can afford and not on statistics that are not realistic in the real world.
I always recommend only buying 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 then you someday may have to terminate it, especially in a bad economy with high inflation.
This is very simple and easy to understand; purchasing a return of premium life insurance policy gives you the advantage of not losing your hard-earned premium dollars if you outlive your term period. When buying these policies, you apply for a return of premium rider to be added to the standard base policy. If you own an ROP policy and outlive the policy’s term period, you get all your paid-in premiums back, including the cost of the rider.
Many optional riders can be very beneficial to your policy and provide a lot of extra value at a low cost.
A return of premium life insurance policy already implements one rider from the very beginning. This is called the return of premium rider, which changes the functionality of the term policy it is incorporated into. There are several other riders you can also include on your new policy, such as:
Waiver of Premium Rider:
This is also referred to as a disability waiver of the premium rider, 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 rider and several others will slightly 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 a disability income insurance policy. It can be easily added to your return of premium life insurance policy as an additional benefit.
Acceleration of Death Benefits Rider:
This option usually is free and built into most good term life insurance policies. However, this rider will trigger a cash benefit if you ever become terminally ill. 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 in certain states in the US.
These policy designs do cost more simply because you have the opportunity to receive every dollar you paid. In many cases, these 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 your 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 massive 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 life insurance companies’ essential factors. 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 dangerous occupation, your rates can be affected. Dangerous jobs such as Iron Workers, Commercial fishermen, 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 ratings are more likely to trigger insurance claims.
Your driving record reveals your respect for the law and your degree of responsibility. People with poor driving records are more likely to have an auto accident, resulting in a fatality.
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. These medical concerns can be passed down through your genes.
Policy Face Amount:
The larger the policy death benefit you choose, the more expensive your policy. The longer the term period you choose will also increase your premiums.
If you use tobacco products, primarily smoking cigarettes, your rates will increase. Cigarette smokers usually pay about 300% more money in premiums. If you smoke, quit as soon as possible because it is a proven fact that tobacco use can ruin your health.
Not all do, but several top-rated carriers offer these plan designs. ROP policies can be purchased with a minimum period of typically 10, 15, 20, and 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 have some of the lowest premiums, but not in every case. Some 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 outlives the policy and then returns all the premiums to the policy owner. Unfortunately, some life insurance companies don’t appreciate the statistics they are faced for the return of premium life insurance products. Life insurance companies like any other business are looking for high profits and the ROP policies are not as profitable for them.
Some people may not always be able to afford the extra cost of these plans designs. If you die before the term period ends, your beneficiary will receive the designated face amount (death benefit) just like any other policy. They will not receive the additional cost of the ROP rider.
A lot comes down to the value you place on initially paying out more money in premiums but having the advantage to receive all your premiums back later on.
The bottom line is if you can afford the additional premium cost. The return of premium life insurance policies can work out very well. 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 policyholder’s premiums back one day.
If you complete the form on the right or use our instant life insurance quoting tool, you will see a drop-down menu choice for 15, 20, 25, and a 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 and that additional cost varies with each insurer.
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. But, again, the statistics are in your favor!
Is the Extra Cost of Return of Premium Life Insurance Worth the Investment?
Whether or not a return of a premium life insurance policy is worth it 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 consider that you are getting back money you already paid into the policy. But, of course, 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.
Here is a good example to help you understand the benefit of Return of Premium policies:
In this example, we will use a 35-year-old male who applies for a 20-year return-of-premium term life policy with a death benefit of $1,000,000. This applicant could easily have a low base premium of $750.00 per year with many of the competitive companies. Let’s now go to the extreme to say the additional cost of the ROP rider is the same as the base premium itself for a total of $1,500.00 per year. After 20 years, our 35-year-old male is now 55 years of age. He has paid $30,000 in total premiums.
His age of 55 years old using the statistics clearly indicate he should be alive and kicking. If he did not purchase the ROP rider, he would receive absolutely nothing in return but a stack of premium receipts. Due to the fact he purchased the return of premium rider, he can be expecting a nice check in the mail for $30,000 with no tax liability attached. Some financial planners would say he could have invested that extra premium for the ROP rider instead and would be making a nice profit.
Investing the Rest?
Some financial planners would say he could have invested that extra premium for the ROP rider instead and would be making a nice profit. If our example would have safely invested that extra money in a money market or a CD with today’s low-interest rates he would be generating less than 1% interest and then have to pay tax on that money also. It is always easy to say invest the extra money, but it never usually works that way because talk is cheap, especially with a stockbroker or a Certified Financial Planner.
Return of Premium life insurance is a great choice but not always the best choice for everyone. Life insurance is not a one size fits all product. Take your time and understand the many types of policy designs available to you.
We are always here to answer any of your questions and help you select the best policy for your specific needs and budget. Feel free to call us seven days a week. We are always here to help you.
All the best,
If you have any questions about Return of Premium Life Insurance, contact us today and let us help you with no cost or obligation. We are brokers and work for our clients, not the insurers. Our only goal is to help you get the lowest rates possible. You can also set up a time at your convenience to talk.