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Return Of Premium Life Insurance

Return of Premium life insurance (sometimes abbreviated to just ROP Term or ROP Life Insurance) is term life insurance with an extra little feature. This additional feature is that at the end of the term of life insurance coverage if the insured is still living then the owner of the policy will get back all of the premiums paid into the policy over the course of the entire term.

For example, if you were to purchase a Return of Premium life insurance policy with a monthly premium of $100 and a term of 30 years then at the end of the 30 years of insurance coverage if the insured was still living then you would receive a check from the insurance company for $36,000 ($100 a month in premium payments X 12 months a year X 30 years of insurance coverage). This $36,000 represents all of the premiums that you have paid into the ROP policy over the 30 years of life insurance coverage. This $36,000 is income tax free to you; the premium payer, as it is simply considered a “giving back” of the money that you had previously spent for life insurance coverage.

How does Return of Premium life insurance work? Why would anyone even considering purchasing regular term life insurance when they could instead purchase ROP term life insurance and potentially get all of their premiums back? These are both good questions and it all boils down to two main concepts:

1) Cost

2) Time Value of Money

As you might expect, Return of Premium term life insurance is more expensive than regular term life insurance. In our previous example, where the ROP term policy cost $100 a month in premiums – a comparable regular term life insurance policy would probably cost anywhere from $50 to $75 a month just depending on the length of the term, the age of the insured, and some other factors. So the cost of ROP term is more than the cost of regular term life insurance.

This then brings us to the second concept which is important to understand: the Time Value of Money. How can an insurance company afford to offer a Return of Premium life policy where they have to pay out a death benefit if the insured dies and if the insured stays alive then still give the policy owner all of their premium payments back? Simple; the insurance company takes the additional money collected over and above what their cost of insurance actually is and invests the money for the length of the policy term.

In our previous example this means that if a regular term policy is priced at $50 to $75 a month and an ROP term policy is priced at $100 a month then the insurance company can take the $25 to $50 difference with a ROP policy and invest the money – the insurance company keeps the interest or investment earnings and then the policy holder gets all of the original premiums paid back to them if the insured outlives the term period.

So should you consider a buying a Return of Premium life insurance policy? If your goal is to purchase fairly cheap temporary life insurance coverage with a “forced savings” component then maybe ROP term is the right choice for you. If your goal is simply to find the cheapest life insurance coverage possible then maybe regular term life insurance is the best bet for you. Chances are you may be able to “buy term and invest the difference” and earn a better rate of return than ROP term BUT 1) You must force yourself to be disciplined and actually systematically save and 2) You must achieve a rate of return that will outpace ROP term’s return on an after tax basis (since the proceeds from the ROP term policy is income tax free).

One word of warning though if you do decide to purchase an ROP term policy: if you decide to cancel the policy early (before the end of the term) then be forewarned that you may not be paid back all of your premiums. Most policies have a vesting schedule where say after 5 years you get back 25%, 10 years 50%, etc. (always 100% back after the end of the term however) so if you decide to cancel early (which you probably should not do unless your life insurance needs change unexpectantly) then you may have paid a little more than you should have for the coverage.

EDUCATION PLANNING TIP: There are many great ways to save for a child’s education including Coverdell Savings Accounts, 529 Plans, EE savings bonds, etc. but one commonly overlooked way to save that may be suitable for your child’s education planning involves Return of Premium term life insurance. It works like this: many people only need life insurance for a specified amount of time (for example, when you have kids in the house that depend on you for support) and term life fits this need perfectly. ROP term can take this idea a step further because of it’s forced savings component.

For example, say that you have a child that is 3 years old and will go to college in 15 years at age 18 and be out from under your roof. You being the responsible parent that you are buy ROP term life insurance for a time period of 15 years. During those 15 years if you were to pass away then there would be death benefit proceeds to take care of the child. If you survive the 15 year term then you will receive the premiums paid in back to you income tax free – which can be a great way to have a nice lump sum amount to pay for college expenses as soon as your child turns 18!

So when it is all said and done just be sure to do the responsible thing and maintain adequate life insurance coverage to protect those you love that are depending on you for support. As for the decision between choosing term life insurance, return of premium life insurance, or even whole life insurance and universal life insurance why not take a few moments from the comfort of your own home or office and compare quotes from multiple types of plans from many different life insurance companies?

Use our free quote finder and in less time than it takes to brush your teeth you can search many different companies and plans and request personalized life insurance quotes!

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