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The basics of return of premium term life insurance

Term life insurance policies can provide important peace of mind, offering benefits if someone dies before what could reasonably be expected.  It may be wise to consider “return of premium” (ROP) term life insurance. Under an ROP policy, if no death benefit is paid by the end of the insurance term, premiums are paid back to the policy-holder in part or in full.

While whole life insurance is often attractive to middle class and affluent consumers, term life insurance policies can have an important place in an insurance portfolio.  For example, some couples buy a whole life insurance policy when they are newly married, then purchase an additional term life insurance policy when they have children.  That way, should one parent die before children can be left unsupervised for several hours or before saving for the kids’ college expenses is completed, a term life insurance policy is on hand to cover childcare costs and/or to boost education savings. 

How ROP policies work

With a traditional term life insurance policy, a coverage term of 15, 20 or 30 years is typically selected, and a fixed annual premium is paid. If the insured lives beyond that term, the contract ends and no benefit is paid.  The insured has paid only for the “risk” that he or she might have died.

Some ROP term life policies give 100 percent of a premium back or part of the premium back at the end of the 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 a return of your premium: As an ROP term life policy or as an ROP rider.

How much can an ROP term life policy cost?

According to the National Association of Insurance Commissioners, purchasers should expect to pay more for a ROP term life policy than a comparable traditional term life policy. For example, a 20-year ROP policy could cost a healthy 35-year-old male about $768 annually, versus $238 per year for a regular 20-year term policy, according to a leading insurer. That amounts to a surcharge of $10,600 over the life of the policy. 

The annual surcharge may range in cost among insurers, depending on the age at purchase time and the length of the term. Be sure to get pricing for different term lengths when researching ROP term life insurance quotes

Who considers ROP policies?

Affluent consumers who want to maintain their loved ones’ financial security sometimes add an ROP term life insurance policy to supplement a whole life insurance policy. 

Those required to pay alimony must sometimes purchase term life insurance, and an ROP policy can appeal to someone who is reluctant to purchase that insurance since there is a premium return at the end of the term.

ROP term life insurance provides a way to hedge bets no matter what happens.

Is ROP life insurance a good deal?

What makes a return of premium life insurance policy -- and the rider version -- so interesting is that it's used by some as an investment vehicle.  But is it actually a good investment?

Let's take a look at the fine print:

ROP life insurance is good if...

  • An analysis of the purchasers’ circumstances are generally in-line with the factors shown below:

Risk tolerance

Existing life insurance

Tax bracket

Investment strategy






Insufficient to cover a certain term; more needed

Medium to high


Young to middle-aged

Good to excellent

  • An individual’s high income prevents investing in a Roth IRA and is seeking an alternative. Roth IRA income limits for 2015 begin at an adjusted gross income of $183,000 for married couples filing jointly, or qualifying widow or widowers, according to the IRS. Those who earn $193,000 or more may not contribute in a Roth IRA. It is possible to buy a return-of-premium product at any income level. An ROP product won't lose value, as long as your insurance company remains in business.

ROP life insurance is bad if...

  • A consumer wants to make this a fundamental part of his or her investment strategy. While the premiums returned are tax-free, the ROP premium surcharge amount could potentially earn more if invested. In the above example where the difference in cost over 20 years is $10,600, an ROP policy holder who invested the annual surcharge of $530 and earned a compound annual growth rate of 5 percent could earn $1,406, ending with $12,006 at the end of the 20-year term.  Of course, there is always a risk that investments could earn less or even lose value.

  • A purchaser isn’t confident that he or she will outlive the policy’s term. An ROP policy doesn’t return premiums when a death penalty is paid.

What if an ROP policy is surrendered early?

It’s not wise to buy any life insurance policy if you don’t intend to keep it. However, if an ROP term life policy is surrendered early, it may be possible to get some premiums back based on a sliding scale if the policy was held for a few years.

Many companies offer no premium return a policy is surrendered within the first few years. Each policy will define the rules for surrendering it, such as when partial premium returns would start and the sliding scale for those returns.

Generally, the longer a policy is owned, the higher percentage of premiums returned, up to 100 percent at the very end of the term. (If the insured dies during the term, beneficiaries receive the death benefit without any premium return.)

Research carefully

Many major insurers offer ROP term life insurance policies. Read insurance reviews and gather enough quotes to make a well-informed decision.  The pool of providers in this slice of the life insurance market is somewhat lower than that offering traditional life insurance policies so there may be less competition among insurers.

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