The basics of return of premium term life insurance
If you’d like to provide for your family with term life insurance, yet you’re confident you’ll outlive the policy, you might want to consider “return of premium” (ROP) term life insurance. Under this type of policy, if no death benefit has been paid by the end of your insurance term, your premiums will be paid back to you in full.
With a traditional term life insurance policy, you buy a coverage term, such as 15, 20 or 30 years, and pay a fixed annual price. If you don’t die within that term, your contract ends and you receive nothing, having paid for the “risk” that you might have died.
Some ROP term life policies give you 100 percent of your premium back (it’s tax-free) or part of your premium back at the end of your term if no death benefit has been paid.
"The key here is that you get a percentage back, tax-free, locked in for 20 to 30 years guaranteed," says Alan Lurty, senior vice president of commodity markets for ING’s Life Business Group.
There are two ways to get return of your premium: As an ROP term life policy or as an ROP rider.
How much will it cost me?
An ROP term life policy will cost more than a comparable traditional term life policy, and there is a significant range among insurers for that surcharge, plus significant ranges depending on your age and the length of term.
Note that with ROP term insurance policies, generally the shorter the term the more expensive it will be compared to a traditional term policy. For example, a 30-year ROP policy could cost you 40 to 50 percent more than a regular 30-year term policy, while a 15-year ROP policy could cost many multiples of a comparable 15-year term policy, according to ING. So make sure you price out different term lengths when getting ROP insurance quotes.
Generally, you will not be returned premiums for extra riders you added to the ROP term policy.
Who considers it?
Companies selling return of premium term life insurance include:
The likely customer for ROP term life insurance is a person who has the confidence he’ll outlive his policy. Or it could be the person who can’t get over the feeling that term life is a “waste of money” if the death benefit isn’t paid out.
ROP term life insurance provides a way to hedge your bets no matter what happens.
What if I surrender my ROP policy early?
It’s not wise to buy any life insurance policy if you don’t intend to keep it. However, if you do surrender an ROP term life policy early, you will get some of your premiums back based on a sliding scale if you’ve held it for a few years.
Many companies offer no premium return if you surrender your policy within the first few years. Your policy will spell out the rules for surrendering it, such as when partial premium returns would start and the sliding scale for those returns.
For example, just because you’re halfway through your policy term doesn’t mean you’ll get half your premiums back if you surrender it. The longer you keep it, the higher percentage of premiums you’ll get back, up to 100 percent at the very end of your term. (If you die during your term, your beneficiaries receive the death benefit without any premium return.)
Can I get it for less?
Companies sometimes offer two flavors of ROP term life policies, usually called basic and enhanced (more expensive). Under the “basic” contract, you pay less in premiums than an enhanced policy because you get back less if you surrender it early.
For either basic or enhanced policies you always receive 100 percent of your premiums back if you get to the end of your term.
Invest the difference?
Maybe now you’re thinking that another option would be to take the premium difference between traditional term life and ROP term life and invest the difference. Would you come out ahead at the end? It depends mainly on your term length. Lurty of ING offers this example: Say you’re looking at traditional 30-year term for $600 or ROP 30-year term for $1,000 annually. That’s $400 a year you could otherwise put into investments. To equal the money you’d get back from your ROP policy at the end of 30 years, you would need to see an investment return on the premium difference of about 5 to 6 percent. Lurty says that with ROP term policies you don’t have to worry about “investing the difference” because it’s being done for you.
Note that the example is for a 30-year term. With shorter-term ROP policies, like 15 or 20 years, you might indeed yield more at the end of the term by investing the difference. And you would need the self-discipline to actually invest those extra dollars each year. Of course, should you die within the term, only the death benefit is paid out. Thus, don’t view this as an investment product.
In April 2009, the National Association of Insurance Commissioners announced its plan to implement new rules for ROP policies and institute tougher restraints on nonforfeiture at the end of 2009. The rule will require insurance companies to increase the amount in reserves for ROP policies. As a result, some companies, including Genworth, are withdrawing ROP policies, and other insurance companies are raising rates.