Term life insurance is an excellent coverage solution for many individuals. However, if you outlive your policy term, the insurance company retains your premiums.
Return-of-premium (ROP) term life insurance offers a different approach. If you outlive the policy term, you receive all the premiums you paid back. In essence, you either get a death benefit or your money refunded.
Let’s explore the pros and cons of choosing an ROP rider, which ensures you recover every dollar spent.
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Return of Premium Life Insurance
We typically recommend term life insurance, as it effectively provides affordable financial security for loved ones for a specified timeframe of 10 to 30 years.
However, many of our clients say, “I want life insurance, but what if I pay all those premiums and never use it?” We get it. That’s precisely why we want to tell you about return-of-premium life insurance.
How Does Return of Premium Life Insurance Work?
Return of premium life insurance introduces an intriguing twist to the conventional term life model. With return-of-premium term life, you get back all the premiums you paid at the end of your term.
Meanwhile, your loved ones still get the full death benefit if anything happens to you during the policy term.
Of course, this money-back feature comes at a cost. According to CNBC, ROP premiums are typically 2-3 times higher than standard term life premiums.
The length of your policy term matters, too. To add a return of premium rider, you must choose a 20-year or 30-year term length.
Plus, you typically must keep the policy active to receive all your premiums back, essentially making it a forced savings plan.
Let’s look at what this means in real numbers: if you pay $200 monthly for 30 years, you’ll get back $72,000 at the end of your term. That’s not just your base premiums – it includes what you paid for the return of the premium rider, too.
The refund can enhance your retirement savings or can be used to convert your term into permanent coverage.
Permanent coverage, which includes universal and whole-life insurance policies, offers guaranteed lifelong protection and cash values that increase over time.
MAXIMIZING A RETURN OF PREMIUM RIDER
ROP policies are a long-term investment ideal for young professionals who commit to regular payments. To maximize your coverage, please follow these strategic tips.
- Timely Payments: Regularly paying your premiums is crucial for securing a full refund. If possible, set up automatic payments—we recommend them to all our clients.
- Avoid Policy Loans: While some policies allow you to borrow against them, we advise against taking loans because they reduce your premium refund and complicate your coverage.
- Understand Policy Features: Understand what options are available at the term’s end, including conversion rights or reduced paid-up coverage.
ROP Insurance Pros and Cons
ROP Insurance Pros and ConsYou now understand that money-back term insurance policies guarantee that you will not lose your money if you do not use your death benefit.
However, these policies are not for everyone because they come with higher premiums than standard term insurance.
Therefore, it’s essential to evaluate the pros and cons to determine whether this type of policy meets your needs and budget.
Pros of Return of Premium Riders
Pros of Return of Premium Riders- Good Health: Adding a return of premium rider can offer a respectable return on investment for younger healthy individuals.
- Money-Back Term Insurance: You will get your entire investment back instead of paying in and receiving no benefit.
- Affordable: ROP insurance costs more than pure term life insurance but is less expensive than universal or whole life insurance.
- Tax-Free: If you are in a higher tax bracket, the return of a premium rider may be an attractive option.
- No-Risk: Adding the rider suits those with a low-risk tolerance for investing in stocks and bonds.
- Convertible: The refund can be applied to convert your term policy into permanent coverage at the end of your term.
Cons of ROP Life Insurance
- Average Health: If you are in average health, the additional cost is often prohibitive for the ROP rider.
- Age: Term insurance with a money-back feature is unsuitable for middle-aged and older people because it becomes cost-prohibitive with age.
- Return on Investment: Typically, the ROP refund reflects the sum of premiums paid rather than investment growth. For astute investors, there may be opportunities for higher returns in other investment avenues.
Surrender Value: If your ROP term life policy is surrendered early, it may be possible to get some premiums back. Still, many companies offer no premium return when a policy is surrendered within the first few years.
ROP Life Insurance Calculator
ROP Life Insurance CalculatorAssessing your risk tolerance and tax circumstances is essential for those considering adding this life insurance rider.
Opting for ROP insurance offers less risk than investing the difference in premiums in the market because it will always pay you back if you do not die.
Moreover, these refunded premiums typically aren’t subject to taxes, making this option advantageous for those in higher tax brackets.
We recommend a personalized analysis to determine if a return-of-premium rider is beneficial for you. This analysis will evaluate the tax-equivalent yield on the additional premiums paid for the ROP rider compared to level-term life insurance.
Return of premium life insurance analysis
If you buy a $250,000 basic term insurance policy, it will cost $356 annually. Adding the ROP rider will bump that to $1,042, an extra $686 annually.
When clients see that $686 difference, they often ask, “Why would I pay that much more?” The answer is simple: if you’re still alive when the policy ends (which we hope you are!), you get all those premiums back.
But we always play devil’s advocate with our clients. Could that extra $686 per year work harder elsewhere?
If you’re comfortable with market risk and have a long-term horizon, investing in a Roth IRA or 401(k) might outperform the ROP rider, especially if you can achieve returns above 6% annually.
However, an ROP rider could be ideal if you prefer a conservative approach or want guaranteed returns. This is especially true if you’re in a higher tax bracket and usually invest in taxable accounts with modest returns, like 4% or less.
ROP Life Insurance Quotes
While ROP riders can be appealing, standard term policies offer more affordable premiums, allowing you to secure substantial coverage without overburdening your budget.
Forbes Advisor suggests basic term coverage for individuals with access to tax-advantaged retirement accounts or those who are comfortable investing in the stock market.
Of course, we totally understand if you’re more interested in a sure thing. Some people feel better knowing they’ll get their money back if they outlive their policy – and that’s perfectly fine!
However, navigating the ROP insurance market can feel like searching for a needle in a haystack due to the limited number of companies offering these unique policies.
But don’t worry – we’ve got you covered. We work with great companies like Cincinnati Life and Assurity Life that offer solid ROP options.
Want to see what this might cost? Check out our free ROP calculator, which provides customized results for your family.
Please make sure that you select either the 20 or 30-year return of premium life insurance option.
ROP Term Life Insurance Quotes
- Use ROP 20 or ROP 30 for Coverage Duration
- Select your Coverage Amount
- View prices by clicking Get Quote
FAQ: Return of Premium Life Insurance
FAQ: Return of Premium Life InsuranceIs a return-of-premium life insurance policy worth it? If you need coverage for a definite timeframe, consider ROP for protection and the opportunity to get your money back. It’s ideal for those who favor a guaranteed tax-free return over unpredictable market fluctuations.
Do you pay taxes on return of premium life insurance? Since the refunded premiums are simply a return of your own money, you will receive 100% of what you paid in premiums back without paying any taxes.
What are the disadvantages of ROP life insurance? ROP policies typically come with higher premiums than standard term life insurance due to the return-of-premium feature. By investing smartly, you could potentially earn more than what you’d get back from the ROP refund.
Can I borrow against a ROP life insurance policy? Some insurers allow you to take out a loan against the policy’s accrued value. However, interest applies to any borrowed amount, potentially diminishing living and death benefits.
What happens if I cancel my ROP insurance policy? Money-back term insurance policies don’t accrue interest and can be challenging to cancel if you wish to recover your paid premiums.
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Affordable Life USA offers comprehensive life insurance solutions to families and business owners throughout the United States.
Our founder, Eric Van Haaften, developed his passion for quantitative analysis while earning his business degree from Ferris State University, which laid a strong foundation for his analytical approach to financial planning.
