When shopping for term life insurance, you might have come across a type of coverage called return of premium (RoP) life insurance. This type of coverage can be either a stand-alone policy or as an optional rider to an existing policy. RoP life insurance works exactly as the name indicates: as long as the insured outlives the term, the policy returns most or all of your premiums paid at the end of the term length.
So why don’t we hear more rave reviews about this coverage option? While RoP coverage can be a nice fit for some families, it has some downsides that make it one of the less popular forms of term life insurance. In fact, according to insurance industry research group LIMRA’s 2017 U.S. Retail Individual Life Insurance Sales Survey, noted as of March 8, 2018, RoP coverage represents only 2% of all annual term life insurance sales.
What is return of premium term life insurance?
Return of premium term life insurance is one of many forms of life insurance that not only provides a death benefit in the event of your death, but also returns the premiums you have paid over the life of the policy if you outlive the term of the coverage.
You pay a premium monthly or annually and have coverage. At the end of the 10, 15, 20, or 30- year term, (whenever your term period ends), if you are still alive all or most of those premiums are coming right back to you. If you have trouble keeping your savings on track or if you like the idea of killing two birds with one stone, RoP coverage might be right for you.
While RoP appears to be a win-win, that coverage comes at a price. Specifically, a higher premium. Additionally, the money that is held by the life insurer is funds that you could be using for other financial purposes.
Cost of return of premium term life insurance
Let’s talk about the cost of RoP coverage. RoP premiums can run from 30% to 300% more than traditional term life insurance. When considering whether RoP might work for you, weigh the higher premiums against the advantages to see where you end up.
Curious about what an RoP premium might look like? A 30-year-old man in excellent health would pay about $92 per month for a 20-year, $500,000 RoP term policy, according to Accuquote as of Aug. 2018. Compare that to the $20.19 per month the same man might pay for a 20-year, $500,000 Haven Term policy. The RoP policy is more than four-and-a-half times more expensive.
A 30-year old woman in excellent health would pay about $77 per month for the same RoP coverage (also according to Accuquote), nearly four-and-a-half times as much as the $17.39 she could pay for a 20-year, $500,000 Haven Term policy.
Is return of premium term life insurance right for you?
Typically, people choose medically underwritten term life insurance over a RoP policy because the premiums are lower and they’d rather keep the extra money they would have paid for an RoP policy in their pockets. For example, we do not offer RoP policies at Haven Life because our internal research indicates that it’s not what our customer base needs or is seeking. But for those who want to get their premiums back and are willing to pay the higher cost, it could be a good fit.
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- Get back all or most of your premiums if you outlive the term duration and haven’t let the policy lapse
- Offers life insurance protection with the opportunity to get your premiums back
- Premiums are returned income tax-free
- Premiums are much higher
- No interest on the returned premiums which means lost financial opportunity for you
- If you let your policy lapse, no premiums are returned
- Not available through all insurance companies or agencies
So what’s the return on a return of premium life insurance policy?
If you’re in need of the protection that a life insurance policy provides, and are also interested in the potential for an income tax-free return of premiums, a RoP life insurance policy could be right up your alley. If some of the downsides of RoP coverage outweigh those benefits, then perhaps a traditional term life insurance policy is the right fit for you, which it is for many people.
Fortunately, there are lots of options when it comes to life insurance, making a good fit possible for all kinds of families in all kinds of situations. With a little research, you can make sure you pick the best kind for your family.
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Rachel Parisi is a freelance writer and attorney. She focuses her writing on insurance, financial services, and employee benefits. In her previous life, she served in the United States Air Force as a missile combat crew commander (think ‘Wargames’). Haven Life has sponsored this article. Opinions are the writer’s own.
The information provided is not written or intended as specific tax or legal advice. Haven Life Insurance Agency does not provide tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Haven Life does not endorse the products, services and/or strategies discussed here.