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The basics of return of premium term life insurance

Term life insurance policies can provide important peace of mind. They can assure your loved ones are covered if you die during your best money-making period. 

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 and then purchase an additional term life insurance policy when they have children. That way, term life can help pay for expenses, such as college tuition, daycare costs and mortgages. 

One drawback of most term life policies is that you don't get back your premiums if you outlive your policy. However, “return of premium” (ROP) term life insurance removes that negative. An ROP plan pays back your premiums in part or in full if you outlive your policy. 

How return of premium policies work

A traditional term life insurance policy may give you an option of 15, 20 or 30 years. You pay a fixed annual premium. If you outlive the policy, the coverage ends and you don't get any money. If you die, your survivors receive the death benefit. 

However, ROP term life policies give you back some or all of the premiums you paid if you outlive your policy. 

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?

Return of premium policies usually cost more than regular term life plans. That's because an insurer knows it will have to pay out something regardless of whether you live past your policy. If you outlive your policy, you'll get some or all of the premiums. If you die during your policy, the insurer will pay the death benefit. 

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

Here is how the average annual premiums compare for a person classified as Regular health status, who's a nonsmoker. 

Health profile and term lengthAge 30Age 40Age 50Age 60

Female, 15-year term, ROP

$1,139*

$1,826*

$3,901*

$6,813*

Female, 15-year term, level

$264

$385

$761

$1,693

Female, 20-year term, ROP

$1,079

$1,851

$3,859

$6,744

Female, 20-year term, level

$303

$466

$948

$2,316

Female, 30-year term, ROP

$880

$1,535

$3,252

N/A

Female, 30-year term, level

$426

$693

$1,573

$7,300*

Female, return of premium at age 65

$575*

$1,070*

N/A

N/A

Male, 15-year term, ROP

$1,380*

$2,183*

$4,592*

$8,606*

Male, 15-year term, level

$309

$450

$964

$2,354

Male, 20-year term, ROP

$1,224

$2,061

$4,550

$8,849

Male, 20-year term, level

$357

$551

$1,220

$3,179

Male, 30-year term, ROP

$1,004

$1,741

$3,694

N/A

Male, 30-year term, level

$523

$868

$2,065

$7,300*

Male, return of premium at age 65

$628*

$1,193*

N/A

N/A

*Limited quotes available. Data source: Compulife Quotation System as of Jan. 2019.

As you can see, one type of ROP policy is to get your premiums back when you turn 65. This could be a more cost-effective option for 30- and 40-year-olds than an ROP with a specific number of years. 

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

 

Age

 

Health

Low

Insufficient to cover a certain term; more needed

Medium to high

Conservative

Young to middle-aged

Good to excellent

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. 
  • 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.)

Buying an ROP policy

Many major insurers offer ROP term life insurance policies, but you may have trouble finding one if you're older. If you're in your 30s or 40s, you should be able to find a ROP for 20 years or more. 

When deciding on a return of premium policy, make sure to 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. A good place to start is Insure's Best Life Insurance Companies.

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