Essential Guide to Return of Premium Term Life Insurance

Term life insurance is a good tool to help offer peace of mind and financial protection if you were to pass away. Admittedly, one drawback of term life insurance is that generally, outliving the policy means losing the money you paid for your coverage. No one’s complaining about being alive, but it can be annoying to think you won’t have something tangible to “show” for your years of responsible coverage.

A return of premium life insurance policy is one option that can let you have your coverage and keep your premium, too. Is this option good or too good to be true? Here’s the breakdown of what to look for in a return of premium life insurance policy, when it can be a smart option and when traditional term life insurance might be a good fit.

What Is Return of Premium Life Insurance?

A typical term life insurance policy offers you coverage during a specific period of time, called the term (usually 10 to 30 years). If you pass away during the term, your beneficiary gets a death benefit payout. If you outlive the term, the money you’ve paid in premiums is gone.

Return of premium (ROP) term life insurance also offers coverage for a particular term, but if you’re still alive at the end, you can get back the premium payments you paid into the policy. For some people, an ROP life insurance policy can offer the best of both worlds: If you pass away, your beneficiaries get a death benefit for better financial security, and if you don’t, you get your money back.

ROP life insurance policies can exist as stand-alone policy. The ROP aspect can also be added with an additional charge as  a rider to a traditional term life policy.

Are ROP Life Insurance Policies Legit?

Paying for coverage and getting the money back can sound too good to be true. It’s always smart to investigate the legitimacy of an option before moving forward. In the case of ROP policies, they are a real and reputable form of insurance. As with anything, there are some nuances worth considering.

First, ROP policies are relatively rare. You may only find a handful of companies that offer a return of premium term life insurance policy or ROP rider for a traditional term life policy. That means less room to compare quotes and other benefits.

Generally, the return of premium amount is simply the total premiums you paid into the policy during the term. That is, you don’t get interest. It’s also important to stay current on your premium payments. If you lapse in your payments or end the policy before the term expires, your agreement may state that you forfeit the premiums you’ve already paid.

Is ROP Worth the Money?

A major advantage of an ROP term life insurance policy is getting your premiums back, essentially bringing you to net $0 for your coverage after the term ends (if you don’t count factors like opportunity cost). The main downside is that in the meantime, you may pay more than for a traditional term life insurance policy.

It’s tough to say exactly how much more expensive a return of premium policy will be. Some sources say you can expect ROP life insurance to cost roughly two to three times as much as a comparable term life insurance policy. Many more life insurance providers offer traditional term life policies than ROP policies, so it’s possible that comparing quotes could lead you to a term life policy that’s much more affordable than the ROP options available to you.

Granted, if you get your premium payments returned to you, you may not mind so much if the payment is higher during the policy term. But some families may find that the extra premium costs don’t fit their budget well. It’s also worth noting that even if you get the full face value of your premiums back, there are financial disadvantages.

First, inflation affects your money’s purchasing power over time. The premium money you pay now may not go as far 20 years in the future. ROP policies don’t pay you interest, so your return of premium may represent a loss in value when you factor in inflation. Additionally, there’s the potential opportunity cost if you’d invested that same money in a higher-performing investment (or an account offering interest) instead.

When Is a Return of Premium Policy Worth It?

In some cases, an ROP term life insurance policy is a great option to get coverage without losing premiums. Some signs that an ROP policy would work well for you include:

• Your budget allows for higher premium payments

• You don’t want to (or suspect you wouldn’t) invest the difference between a regular premium and a more expensive ROP premium on your own

• Getting money back one way or another from your life insurance policy is a priority for you

Some signs ROP might not work best for you include:

• Finding lower premium payments is a priority for you

• You want to be able to compare prices at a wider range of insurance providers

• You’re interested in a comprehensive financial strategy that includes investing or taking advantage of interest-yielding accounts

• Your budget would make meeting ROP premium payments difficult

The promise of getting your life insurance premiums back can be a great feature, if you can afford to wait. An ROP life insurance policy has some distinct advantages worth exploring, too. 

One option is to take the extra money that it’d cost to get a ROP policy, and invest that difference instead. Although this has its drawbacks (you wouldn’t get your premiums returned if you outlived your policy), you would open yourself up to more flexible options in other ways, such as freeing that money now to potentially earn returns in the meantime.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

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