What Is Return Of Premium Life Insurance? - Forbes

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors’ opinions or evaluations.

Life insurance is an essential tool for protecting loved ones against financial loss. But you might not love the idea of making years of payments toward a policy that may never result in a payout (good news for you, not so much for your wallet).

Fortunately, one type of life insurance policy takes that possibility off the table. Return of premium (ROP) term life insurance refunds all of the premiums you’ve paid if you’re still alive when the policy term is over.

Here are some factors to consider before committing to this type of life insurance policy.

Contents

How Return of Premium Life Insurance Works

Return of premium life insurance is usually a type of term life insurance, meaning you lock in a rate for the level term period, such as 10, 20 or 30 years. When the level term period is over, you can generally renew the policy every year, but at higher rates.

With a typical term life insurance policy, you pay regular premiums during the time your coverage is in force. If you die during that time, your beneficiaries receive a life insurance payout known as the death benefit. If you’re still alive when the level term period is over and you haven’t renewed the policy, there’s no payout.

ROP life insurance allows you to get those monthly premiums back if you’re still living at the end of the policy period. ROP life insurance can be purchased already integrated into a policy or added as a rider to a regular term life insurance policy, and it’s usually more expensive. If you outlive your coverage, 100% of the money you paid in premiums during the term is returned to you, tax-free. However, if you fail to make your payments or cancel the policy, you may not get a premium refund (exact rules vary by insurer).

A return-of-premium feature is also sometimes available on types of permanent life insurance. For example, Nationwide offers a return-of-premium rider on one of its universal life insurance policies.

Reasons to Get Return of Premium Life Insurance

Despite a higher cost, there are some benefits to ROP term life insurance:

Get your money back. If you outlive the policy term, the money you paid in premiums is returned back to you, meaning there is no risk of losing money. However, you lose gains you might have made by investing the money.
Forced savings. An ROP insurance policy works like a forced savings account, guaranteeing that you’ll receive a large payment in the future. Even though it’s cash that already belongs to you—not new money—it can be nice to know you have a chunk of savings reserved for when you’re closer to retirement age.

Life Insurance Policies with Return of Premium

Below are some examples of term life insurance policies with a return of premium option:

AAA Life Insurance: Available in 15-, 20- or 30-year terms, with $100,000 and up in coverage.
Cincinnati Life: The Termsetter ROP policy is available for level term periods of 20, 25 or 30 years. Minimum face amounts start at $25,000, depending on your health classification.
Country Financial: Available as a rider on 20- and 30-year term life insurance policies.
Illinois Mutual: Coverage ranges from $50,000 to $500,000, and terms can be 20 years, 30 years or to age 65.
Lincoln Financial: Available on TermAccel and LifeElements in 10-, 15-, 20- and 30-year terms.
Mutual of Omaha: Available on Term Life Express in 10-, 15-, 20- and 30-year terms.
Pacific Life: Available on PL Promise Term in 10-, 15-, 20- and 30-year terms and Pacific Elite Term in 10-, 20- and 30-year terms.
Protective: Available on Protective Classic Choice Term policies in term periods from 10 to 40 years.
State Farm: Coverage amount starts at $100,000 and is available in 20- or 30-year terms.

How Much Does Return of Premium Life Insurance Cost?

Term life insurance is usually considered an affordable alternative to more expensive permanent life insurance options such as whole life and universal life insurance. Return-of-premium term life insurance is typically two to three times more expensive than regular term life insurance, according to Policygenuis.

One major downside to ROP life insurance is that you essentially provide an interest-free loan to the insurer. And if you factor in inflation, you actually end up getting less money back at the end of the term since the refund doesn’t include any interest.

A better option may be to buy a traditional term life insurance policy, then take the extra funds you’d pay toward an ROP rider and put them in a safe investment account instead. Not only will you preserve some cash, but you could also end up with more money by the end of the policy term by putting your money where it can earn modest returns.