What Is Return of Premium Life Insurance?

How a Return of Premium Life Insurance Policy Works

Standard term life insurance policies cover you for a set period, typically 10 to 30 years, and guarantee your beneficiaries will receive a death benefit if you pass away during the term. If you outlive a term life policy, your coverage will end and the premiums you paid toward it will be gone.

Return of premium policies, on the other hand, refund the premiums you pay if you're still alive when coverage ends. Some ROP policies also offer a cash value component that you can borrow against while the policy is intact. (Loan amounts are deducted from your refund if you outlive the policy.) If you miss a payment or terminate the policy before the end of the term, you risk forfeiting any premiums made on the policy.

Typically, ROP policies are purchased as a rider, or optional benefit, that's added to a standard term life insurance policy. You may also be able to purchase a standalone ROP policy depending on the insurance provider. Similar to a standard term life insurance premium, ROP premiums are level, or a set amount, for the duration of the policy.

ROP policies are costlier than standard term life policies. To illustrate, a healthy 25-year-old female in Illinois would pay $49.50 per month for a 20-year $250,000 ROP policy. But a traditional term policy for the same term and amount has a monthly premium of $18.92.

Who Qualifies for an ROP Life Insurance Policy?

ROP life insurance is generally available to individuals who qualify for standard term life policies. Insurance providers have stipulations related to your age and health, among other factors that dictate your eligibility for coverage. However, you generally won't need a medical exam to add an ROP rider to your policy.

What Is the Rate of Return on Life Insurance?

The return on an ROP policy is two-fold: You'll get the premium payments back when the policy ends, and there's comfort in knowing your loved ones are protected if you unexpectedly pass away during the policy's term.

But there's a downside: You won't earn interest on the premium payments you make, and thus your eventual return could depreciate due to inflation over the policy term. You might earn a greater return on your money if you purchased an inexpensive term policy and invested the money you saved elsewhere.

Is Return of Premium Life Insurance Right for You?

An ROP life insurance policy could be a good fit if you like the idea of paying for a policy that's guaranteed to provide a benefit to either you or your beneficiaries. However, the costs could outweigh the benefits if the premium payments are too steep for your budget or if you could invest your money elsewhere for a better return.

Before deciding if ROP life insurance is right for you, consider the benefits and drawbacks.

Pros:

• The cost of the policy is $0 if the premiums are returned when it ends.
• The policy provides a vehicle for saving money.
• Some policies build cash value that you can borrow against during the coverage period.

Cons:

• ROP policies are more expensive than standard term life policies.
• You likely won't get your premium payments back if the policy terminates early.
• The value of the premium refund will depreciate over time due to inflation.

If you decide ROP life insurance is a good fit, shop around to find the best deal. Not all policies or riders are the same, and a low-cost premium doesn't mean you're getting optimal coverage. Do your research to ensure the insurance provider is reputable and the policy features are acceptable.

Also, check your credit score to see where you stand. Some insurance providers evaluate your credit health when deciding whether to approve you for coverage and how much to charge for premiums. You can check your free credit score and report from Experian before you apply to avoid surprises.