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Insurance Life Insurance

Is Return of Premium Life Insurance Worth It?

There are two main types of life insurance available from an insurance company: whole life and term life.

  • Whole life insurance is more expensive, can last for your entire life, and doubles as an investment vehicle.
  • Term life insurance, on the other hand, is less costly and there’s no investment aspect to it. With a typical term life insurance policy, you pay reasonable premiums for coverage, and if you die during the term when the policy is in effect, your family receives a death benefit.

If you’re thinking about buying term life insurance, there’s one clear downside: if you don’t die while the policy is in effect, all the premiums you paid were effectively wasted because your family never receives the death benefit you paid for.

Return of premium life insurance or return of premium term life insurance solves that problem – but that doesn’t mean buying it is necessarily the right choice for everyone. You’ll need to weigh the pros and cons to decide if a return of premium policy is right for you.

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What is a Return of Premium Life Insurance Policy?

With a return of premium life insurance policy, you get your premiums back at the end of your coverage period if you’re still alive and your beneficiaries didn’t receive the death benefit.

With this form of term insurance, the full amount of premiums paid are returned to you, but you don’t get back the costs of fees or most other coverage add-ons. So, if you paid $800 per year for a term-life policy for 20 years, you’d get back $16,000 at the end of the 20 year period.

If you’re interested in getting your premiums back at the end of your term of coverage, you can usually add a Return of Premium rider (ROP) to a basic term policy This would mean you pay additional costs for this protection as an add-on to your policy. Or, you can buy a specific ROP life insurance policy that’s set up to give your premiums back if you don’t die while covered. You can speak with an insurance agent about the options available. 

But, whatever approach you pick, be aware that return of premium policies or traditional term policies with ROP riders will cost substantially more than a traditional term life policy that doesn’t guarantee premiums will be paid back. Since a ROP policy is more expensive, you’ll need to decide if it is worth it to buy ROP life insurance or if you should just stick with a typical term life policy.

Pros of Return of Premium Life Insurance

Return of premium policies are attractive if you don’t want to feel as though you’re “wasting” your money on insurance in the long-term. It can be frustrating to pay premiums for decades and receive nothing back if you don’t die during your coverage term, but a guarantee you’ll get your premiums back can turn buying coverage into a win-win. Either your loved ones get the death benefit, or you get back what you paid in.

Buying ROP policies isn’t just a simple way to limit financial risk either, it’s also a kind of forced savings. You pay in money for your policy in the form of premium payments and you can get that money back at the end. Receiving a check for $16,000 (from our above example) or whatever amount of premiums you paid in would be a big benefit when your kids are reaching college age or you’re nearing retirement.

Cons of Return of Premium Life Insurance

While a guarantee that you’ll either get your death benefit or get your money back sounds good, you can’t forget to consider the big downsides of return of premium policies.

One downside is the substantial added cost. Monthly premiums for a ROP policy are typically around 30 percent higher than for a traditional term life policy without a ROP rider. This could add hundreds of dollars per year to the amount you pay for life insurance.

You can’t invest this money if you tie it up in your insurance policy. That means you miss out on the chance to put it into the market and potentially earn a generous return that could add up to more than you’d get back from your insurer if you don’t die while covered.  

ROP policies aren’t typically an investment in the same way that whole life insurance policies are, since a whole life policy typically earn more of a return on its investment. Even if your ROP policy is structured so the higher premiums result in your insurance policy acquiring a cash value, the potential upside – or possible return on investment – is typically much lower than the returns you’d get if you invested your money elsewhere.

Earning a lower return not only matters because that means you have less money to invest in assets where compound interest can work for you, but it’s also important because the purchasing power of money erodes constantly thanks to inflation. When premiums you pay today are returned to you a decade or two from now, the money you get back will be worth less than the money you paid in. Think about how prices change over time to understand why this is a big issue and why ROP policies may not be as good a deal as they seem on the surface.

You may also have fewer options for which policies you buy, as not all insurers offer you the option to buy ROP insurance or add a rider onto a term life policy. You want to be able to shop around and choose from many different carriers to find an affordable policy from an insurer you can trust. Limiting your options to only those insurers offering ROP coverage may mean your policy as a whole doesn’t provide terms that are as good.

The Bottom Line

Buying life insurance is a complicated decision. There’s a lot to consider when choosing what type of policy is right for you, including your personal preferences, your family situation, and the opportunity cost of the decisions you make.

While some people will decide ROP coverage makes sense because they want the forced savings that comes with higher insurance premiums or because they want to know their money isn’t being wasted on premiums, many other people decide they’re better off getting cheaper coverage in the form of a traditional term life policy without a ROP rider.

Only you can decide what’s right for you – but whatever approach you decide, carefully consider the pros and cons. Don’t assume that just because you get premiums back that you’re getting a better deal without thinking about the trade-off that comes with paying more for a policy. Weigh the benefits and costs of each life insurance company to make the best choice for you.