Return of premium life insurance
Key takeaways
- Return of premium life insurance refunds most or all of your premium payments if you outlive the term length of your policy.
- Due to the refund feature, this policy type will generally cost more than a standard term policy.
- Premium refunds are tax-free but typically don’t include the money paid for riders or any additional fees.
- If you allow your policy to lapse or you cancel this type of policy early, you likely won’t receive your refund of premiums.
Return of premium life insurance can be a good way to plan for the future. This type of insurance offers the assurance of a payout — unlike other term life insurance policies — with the policyholder receiving back the premiums paid if they outlive the term. While it comes with a higher premium than traditional term life insurance, return of premium policies can be an attractive option for some. Here’s what you need to know to decide if return of premium life insurance is right for you.
What is return of premium life insurance?
Return of premium (ROP) life insurance is a unique blend of term life coverage with an interesting feature: the potential to get your premiums back. It stands apart from traditional term policies, which simply expire if you outlive the term and you don’t receive any money back. Instead, ROP life insurance offers a refund of the premiums you’ve paid over the policy term (typically 10, 20 or 30 years ), creating a hybrid between pure insurance and a form of financial reimbursement.
To better understand how return of premium life insurance works, let’s look at a few real-life scenarios:
- Outliving the term: Say you have a 20-year ROP term policy. If you are diligent about paying your premiums for the entire duration, you’ll receive a lump sum refund typically equal to the total premiums paid once the term concludes.
- Passing away during the term: If you were to pass away within the coverage period, your beneficiaries would receive the policy’s death benefit, just as they would with a standard term policy. In this situation, the return of premium feature wouldn’t apply, as the primary purpose of the life insurance would have been fulfilled.
- Canceling an ROP permanent policy: Some permanent life insurance policies offer a return of premium option. With these, you might be eligible for a partial refund of your premiums if you choose to cancel the policy partway through. However, the specifics will likely vary by insurer, so check with your carrier about the details of your policy.
In short, return of premium life insurance provides an opportunity to balance the security of life insurance with the potential to receive your money back if you outlive the term. While there are certain conditions to qualify for the premium refund, such as maintaining the policy and paying premiums consistently, it could remain an attractive option for those seeking flexibility and a “money-back guarantee” in their life insurance coverage.
How return of premium life insurance compares to other types of life insurance
To dive a bit deeper into the world of return of premium life insurance, we’ll compare it to traditional term life and different types of permanent life insurance policies.
| Type | Coverage period | Cash value | Premiums refunded | Cost | Best for |
| Traditional term | Typically 10, 20 or 30 years | None | No | Usually the most affordable | Individuals who need coverage for a specific time frame at the lowest cost. |
| Return of premium | Typically 10, 20 or 30 years | None | Yes, if term is completed | Higher than term but lower than permanent | Those seeking coverage with a potential refund if they outlive their policy. |
| Whole life | Lifetime | Builds cash value guaranteed over time | Typically no, unless specific refund features apply | Significantly more expensive | People who want lifetime coverage with predictable premiums and cash value growth. |
| Universal life | Lifetime | Builds cash value, with flexible premiums | Typically no, unless specific refund features apply | High, but depends on premiums paid | Those who need flexible premiums and coverage to adjust to life changes. |
| Variable life | Lifetime | Builds cash value tied to investment performance | Typically no, unless specific refund features apply | High, with additional investment risk | Individuals comfortable with higher risk who want investment opportunities within their policy. |
| Indexed universal life | Lifetime | Builds cash value tied to market index performance | Typically no, unless specific refund features apply | High, but depends on premiums paid | Those who want flexibility and growth potential tied to market indexes but with some guarantees. |
Return of premium life insurance proves to be a sort of sweet spot in the insurance industry, marrying the simple protection of term coverage with a compelling money-back feature. While traditional term insurance offers pure protection at the lowest cost, and permanent policies build cash value through various investment vehicles, ROP paves its own path.
This middle-ground approach could appeal to those seeking more than basic term coverage but who aren’t ready to embrace the higher costs and intricate features of permanent policies.
Who is return of premium life insurance best for?
ROP insurance isn’t for everyone, but it offers distinct advantages in certain situations. The combination of coverage and guaranteed premium return creates different opportunities for those seeking protection with a built-in safety net. Here are a few ways where this approach to life insurance could be useful.
Cautious savers
For those who prefer certainty over chance, ROP insurance delivers premium returns without market drama. The guaranteed return feature speaks directly to those who sleep better knowing exactly where their money goes.
High earners
While these policies aren’t as expensive as permanent life insurance, the premiums are still higher than traditional term. If you have disposable income, the peace of mind you receive knowing you get a refund if you outlive the policy can be attractive for those who can easily afford it.
Parents and guardians
ROP life insurance could be a smart choice for parents looking to protect their family financially while their kids are still dependent on them, with the added perk of getting their premiums refunded once the children are all grown up and independent. The coverage can be designed to run parallel to the parenting journey, providing protection during the dependent years and a reward that aligns with your kids becoming financially independent.
How much does return of premium life insurance cost?
Life insurance gets interesting when you add a return of premium rider. It’s more expensive than traditional term coverage, but as we’ve mentioned, survive the term, and the money you paid comes back to you. Simple enough in theory, but the actual cost is where this path gets a bit divided.
Your premium cost is comprised of a web of personal factors. Age is the heavyweight, with health history throwing serious punches, too. Gender and term length round out the major players that will shape your rates. In the world of life insurance, the younger and healthier you are, the more affordable your policy will typically be.
However, numbers tell the story best. Take, for example, a healthy 25-year-old woman shopping for a $250,000, 30-year policy. Traditional term coverage might run her approximately $19.90 per month — pretty manageable. Tack on that ROP rider and the premium could jump to as high as $51.77. Sure, she’d eventually see the $18,637.20 return after three decades, but that’s a long game to play.
The premium refund feature sounds sweet, and who doesn’t love a good money-back guarantee? But before jumping in, consider what that extra $31.87 monthly difference between traditional and ROP coverage could have done over the years. Putting it in the right investment account might actually put more cash in your pocket over the years your policy covered you.
Then there’s the commitment factor. ROP life insurance requires consistent on-time premium payments – one missed payment, and you’re out of both the coverage and any hope of that refund. If you cancel your ROP term policy early, the same principle applies. You need rock-solid confidence that those steeper premiums won’t strain your budget over the course of your policy.
Smart money moves often require clear eyes. Run your numbers carefully or, better yet, bring in a financial advisor who can stress-test ROP coverage against your broader financial goals. What looks like a clever insurance hack might actually be a costly detour from the bigger picture.
Pros and cons of return of premium life insurance
As with many insurance options, there are pros and cons to a return of premium life insurance policy. Only you can determine whether the pros make this type of policy a good investment for you.
Pros
- Refund of premiums: You outlive your term, you get your money back, assuming you’ve kept the policy active. A rare win-win in the insurance world.
- Tax-free refund: Uncle Sam won’t touch your refund check. When your term ends, the returned premiums skip right past the IRS.
- Financial predictability: There’s something deeply reassuring about knowing exactly what you’ll get back. No market fluctuations, no guessing games. Just a clear, concrete number you can factor into your long-term planning.
- Dual benefit: Your loved ones get protection during the term, and if you outlive it, you haven’t spent a dime in the long run. Not many insurance products can make that claim.
Cons
- Higher premiums: You’ll pay a decent amount more than with traditional term coverage. Those premiums can really stretch a budget, and that extra cost isn’t trivial over time.
- No refund for riders or extras: The fine print matters here. Added features like riders, flat extras or higher rates due to health factors? Those premium dollars are typically not returned. Which, in this case, could make your final refund amount unpredictable.
- No refunds for term life cancelations: If you cancel your policy or miss payments, that refund guarantee is gone. You’re either in it for the long run, or you’re out of luck.
- No interest earned: Think of it this way – your premium dollars sit there for years or decades, working hard for the insurance company, not you. When you finally get them back, they’re worth less than when you started, thanks to inflation. It’s a sobering reality check for anyone eyeing this as an investment strategy.
Bottom line
Return of premium life insurance occupies a distinct corner of the market. The concept is simple yet compelling. Pay higher premiums now and get them all back if you outlive your term. While the upfront costs exceed traditional term coverage, the promise of recouping your investment is often an appealing option for people who value predictability, such as empty nesters planning for retirement or high earners looking to add a safety net to their financial game plan.
However, careful planning and research matters here. Those higher premiums come at a cost. The extra money spent could potentially earn more elsewhere, like in an investment account with growth potential. While ROP policies offer a guaranteed refund, they don’t generate interest or provide significant returns beyond what you’ve paid. Before deciding, it’s a good idea to consult with a financial advisor to see how this type of policy fits into your overall financial plan. For some, the balance of protection and a guaranteed payout makes sense. For others, alternative options may offer greater flexibility and returns.
