How does Return of Premium Really Work?

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Some people consider buying term life insurance a total waste of money, regardless of how low the premiums are.  If you are one of those people, maybe you would be interested in buying a policy that will return your premium back if you don’t die before the term is over? So, you buy a term life insurance policy for $100 per month for 20 years, and if you don’t die in those 20 years, you will get back $24,000 back. Did I get your attention?

In this article, we will find out if a return of premium life insurance (ROP) policy is really worth it, and also how it works. I will take a look at premium comparisons and exclusions that you should be aware of when you buy a return of premium life insurance policy.

You can also see sample term life insurance rates here.

What is ROP?

Essentially, a return of premium life insurance policy (“ROP”) is a term insurance policy that returns the premiums paid by the insured over a set period, from the life insurance company at the end of the term period. For instance, if you take out a 20-year policy with a “Return of Premium” clause, and you outlive the twenty-year period, you will get back all the money paid for the coverage. The refund will be in a form of a lump sum, tax-free payment (it is not considered income) to the policy owner. Before you jump for joy, though, let’s take a look at some of the pros and cons.

Return of Premium Pros

  • Getting your premium back after 20 or 30 years can be very appealing, especially for those who see term life as a total waste of money.
  • For those with the means, it could be a safer investment compared to the stock market or real estate market, as they can hedge against other types of riskier investments.
  • High revenue individuals who can’t contribute more to their IRA may just get an ROP because this won’t lose its value.
  • For those who like the idea of whole life because of the saving component but want to pay less, ROP should be appealing.
  • The refund is one lump-sum, tax-free payment.
  • Some policies allow you to take a loan against the principle in the account.
  • A good policy for those who hate to save, because it forces them to stick to a plan.

Return of Premium Cons

  • The money paid toward premiums will earn no interest for twenty years; you only get your paid premiums back.
  • ROP is expensive. When compared with term insurance, expect to pay 2-3 times as much depending on your age and the death amount.
  • You can buy more coverage for the same premium than ROP charges.
  • You better make sure you can pay for the entire time, because nothing would be worse than paying for 19 years, then missing the last year and getting nothing at the end if you’re still alive.
  • You can probably get a better return somewhere else, even putting the money in a money market with the lowest interest will get you more.
  • You are limited to the plan availability by the insurer, for instance you cannot buy a 10-year return of premium; the most common one is 20 years.

Should You Buy ROP?

If it was me, I wouldn’t. I look at a life insurance policy as a vehicle to protect who I love instead of as an investment. Just because I get my premium money back it doesn’t mean that I should jump into buying it. Money now is better than money later, which means the extra money that I’m paying could be mine now and I don’t have to wait for 20 years to get it back.

Time value of money isn’t paid back, inflation is eating your money. Parking your money may seems safe, but it isn’t ideal. You park it, while the insurance company is investing it and generating revenue, but at the end you get none of the profit.

Life insurance was meant to protect your loved ones in case you die prematurely, so treat it as such and calculate how much you need and for how many years, and that’s it. For most people, once the mortgage is paid and the children are out of college, you don’t really need a life insurance policy anymore.

Examples of 20-year Term Policy Premiums for a Term vs Return of Premium:

Male 20-year Term

AGE$100,000$250,000$500,000$1,000,000
20$9.14$13.17$20.74$34.79
30$9.31$13.42$20.69$35.53
40$11.27$18.18$29.36$52.78
50$22.88$42.79$78.75$146.03
60$54.68$111.56$211.13$406.93
70$172.38$406.56$812.58$1553.16
80NANANANA

Male 20-year ROP

AGE$100,000$250,000$500,000$1,000,000
20$15.75$30.23$54.37$102.66
30$18.18$36.32$66.55$127.02
40$34.71$77.65$149.20$286.13
50$83.69$165.38$330.75$612.50
60$179.74$365.97$731.94$1322.13
70NANANANA
80NANANANA

Female 20-year Term

AGE$100,000$250,000$500,000$1,000,000
20$7.66$10$13.92$21.75
30$8.41$12.12$18.19$29.43
40$10.43$15.44$25.26$43.94
50$18.83$31.67$55.78$103.55
60$37.43$77.92$140.83$269.92
70$128.19$265.90$531.87$1016.72
80NANANANA

Female 20-year ROP

AGE$100,000$250,000$500,000$1,000,000
20$11.83$20.45$34.80$63.51
30$14.96$28.28$50.46$94.83
40$27.06$58.51$110.93$215.76
50$58.64$135.41$270.81$500.50
60$120.49$290.94$581.88$1089.38
70NANANANA
80NANANANA

*All rates quoted on this page are for a super-preferred healthy individual who does not use tobacco. Monthly rates are updated as of Jun 2016 and are subject to underwriting approval.*

Return of Premium Exclusions

Not all insurance companies have the same exclusions. This is only a general list:

  • The return of premium does not include substandard charges.  Meaning, if you were rated up because of health conditions and paid more for the policy, you will only get back what was a preferred rate.  So if you bought a policy for $60 per month at a substandard rate and $45 was the preferred rate, you will only get that.
  • The return of premium does not include a rider charge.
  • Some companies may offer a return of premium if you choose to surrender after 4 or 5 years.
  • If you take a loan against your policy, you will pay 8% per year or more.

Last Word

Return of premium life insurance is just another example of why you shouldn’t buy life insurance by yourself. Things rarely look they way we think they are, and on the surface it may look really good until you find out that the only reason you bought it is because the agent in the call center had to meet his quota. If you feel confused, you can call us at 866-326-3053 to get a personalized quote or run the quotes on this page yourself. Remember, working with a broker costs you absolutely nothing so you’re getting all their knowledge and years of expertise for free.

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2017-10-16T07:42:22+00:00 October 12th, 2017|Life Insurance|0 Comments

About the Author:

Ron is a licensed life & health insurance broker. He has 2 amazing rescue pit bull puppies. He also enjoys real food, heavy squats, critical thinking, and reading.

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