Life insurance is an important instrument as a financial safety net for your household if you die. However, you might not consider the thought of making payments to a policy that could not lead to a payout where you might lack funds in your pocket. But the return of premium life insurance helps to make that issue to be worthwhile.
Return of premium life policy reimburses all costs incurred if the policyholder remains alive after the term coverage expires. This process minimizes the policyholder’s net cost to zero. In other words, a policy that offers a return of premium is a return of premium life insurance.
What is Return of Premium Life Insurance
Return of premium (ROP) life insurance provides a return on premium payments if the policyholder outlives the term, requiring higher premiums during the policy’s duration. A term life insurance policy is only valid for a specified period, typically 10, 20, or 30 years. If you outlast the period, no death benefit is paid-out.
Additionally, a return of premium policy (or rider) reimburses you for any or all of the premiums you paid if your term life policy expires without paying out. Furthermore, level-term life policies often offer a return of premium riders, where premiums are set at purchase and remain constant throughout the term.
How Does Return of Premium Life Insurance Work
You’ll choose a term length, such as 20 or 30 years when purchasing a stand-alone return-of-premium life insurance policy. Your life insurance beneficiaries will get the death benefit if you pass away during that period. If you don’t, you’ll receive a full refund of your premiums, interest-free, with your insurer potentially deducting handling fees and other costs.
Since the money you get is only a reimbursement for the payments you made, it is not subject to taxes. In contrast, if you are still living at the time the policy expires, you will not get any money from standard-term life insurance. Because ROP life insurance is a term life policy that gradually accrues cash value, it’s an intriguing product. With sufficient cash value, you can borrow against your policy, withdraw cash, or surrender the policy if you no longer require coverage.
How Much Does Return of Premium Life Insurance Cost
While the return on premium benefit may be appealing, you will have to pay more for that flexibility and privilege. Depending on several circumstances, your premiums could be two to five times those of other term insurance companies.
If you’re looking for low-cost life insurance, you might want to choose a classic-level term policy. Term life insurance is a more affordable alternative to more costly permanent policy options like whole and universal life insurance.
Why Get Return of Premium Life Insurance
Return of premium life policy is primarily used for risk mitigation, as it may be more cost-effective for those concerned about outliving a term life policy. One significant disadvantage of ROP life insurance is that you essentially make an interest-free loan to the insurer. Inflation may result in a smaller refund amount due to the exclusion of interest in the refund process.
Consider depositing additional funds for a ROP rider in a secure investment account and obtaining a regular term life insurance policy. Investing in a policy with moderate returns can save you money and provide extra funds at the end of the policy.
How Do You Choose a Return of Premium Life Insurance
To ensure you obtain the greatest ROP coverage for your needs, both financially and personally, there are a few things you should check for when searching for one:
- Comparing the cost of a ROP term policy to a normal term policy can help determine the additional cost.
- When evaluating an insurance company’s financial stability and chance of meeting its contractual obligations, it is essential to check AM Best’s financial stability ratings.
- One useful resource for evaluating client satisfaction with a certain life insurance company is the NAIC complaint index. Also, view the J.D. Power customer survey findings to see how 21 of the largest insurance firms are performing.
- Choose a provider that allows conversion for future term policy conversions to permanent policies.
- Certain riders will be included at no extra cost, while others may require payment. When comparing quotes from different life insurance companies, consider the cost of any desired additional riders.
Final Thought
You can choose between a return of premium life insurance policy and a return of premium rider based on your tax status and risk tolerance. If a policyholder has access to tax-deferred or tax-free assets and is OK with stock market fluctuations, a simple term policy with no riders is a better option. However, risk-averse policyholders may find the income rider policy’s guaranteed rate of return more tempting.