A Return of Premium Rider, also known as an ROP rider, can be added to some term life insurance policies to return some or all of the policyholder’s premiums at the end of their term. This may be a beneficial rider to consider for consumers who prefer term insurance, but would like to see a return of some or all of their premiums should they outlive their term life insurance policy.
How Do Return of Premium Riders Work?
A Return of Premium Rider works by returning some or all of a policyholder’s premium at the end of their term. For standard term life policies, the death benefit is only paid if the policyholder dies within the policy’s term, and premiums are not reimbursed. The ROP rider can be an attractive feature to those who want term life insurance instead of permanent life insurance, but would still like to insure that they get something back if they outlive their term life policy. For example, if a policyholder has a 20-year term policy with a ROP rider, at the end of their 20th year, they may be able to cancel the policy and receive a return of the premiums that they paid into the policy.
On most ROP policies, the premiums can only be returned at the end of the term. If you cancel the policy early or it lapses because of nonpayment, the premiums are not returned. Additionally, the policyholder may only have a certain time period to cancel the policy and receive their premiums back. For example, the policy may state that the policyholder has 12 months from the end of their 20th year to cancel the policy and receive their premiums back. If they fail to cancel the policy within that time, they may forfeit the reimbursement altogether.
Purchasing life insurance is an important decision and understanding how an ROP rider works, will help the consumer make a more informed decision for themselves and their family.
How Traditional Term Life and Permanent Life Insurance Compares
|Return of Premium Life Insurance||Traditional Term Life Insurance||Permanent Life Insurance|
|Premium cost||Higher than comparable term life policy||Relatively lower than ROP and permanent life||Higher than ROP or Term policies|
|Premium refund||Yes; returned at end of term if policyholder outlives term||No; no refund if policyholder outlives term||No; but premiums may help build cash value|
|Term length||Set term length; usually 10, 20, or 30 years||Set term length; usually 10, 20, or 30 years||No term life; lifelong coverage as long as premiums are paid|
|Death benefit||Not guaranteed; policy may cancel at end of term||Not guaranteed; policy may cancel at end of term||Guaranteed; payout as long as policy is active|
Traditional term life insurance generally has a set price for a set term, and the death benefit is only paid out if the policyholder dies during that term. If the policyholder outlives the term, there is no death benefit and unless the policyholder has a ROP rider, the premiums paid are also forfeited. In addition, after the initial term is over, the price may increase drastically for renewal, or the policy may lapse altogether.
With permanent life insurance has no term and instead provides coverage for the policyholder’s entire life. However, permanent policies are usually significantly more expensive than a term policy when comparing the same coverage amount. But unlike term policies, permanent life policies accumulate a cash value that the policyholder can access during their lifetime. This cash value can be used to help pay for premiums, as supplemental income, or as a policy loan.
If a permanent policy is more than you can afford at the moment, a term life policy can still help protect your loved ones should you pass away. But while an ROP rider sounds like a good idea, it should be noted that adding this rider to a term policy typically makes the policy premiums significantly higher.
How Much Do Return of Premium Policies Cost?
When looking to purchase a term policy with a ROP rider, policyholders can expect the ROP policy to be higher than a traditional term policy — in fact, it can be as much as two to three times higher. Although the price of a ROP varies from company to company, in general they are higher priced because the company is returning the policyholder’s premiums at the end of the term.
Should You Consider a Return of Premium Rider?
A ROP policy may be best fit for those that want term life insurance but would like a guarantee they will receive some of their premiums back. However, it is important to carefully read the details on the ROP rider. Most ROP riders only return their premiums at the end of the term, and the customer must cancel the policy within a certain time period to receive their premiums back. If the customer does not follow the specific terms of the rider, they may not see a return of any of their premiums.
In addition, it is important to fully consider what it means to pay up to three times as much on your premiums for a ROP rider rather than less expensive traditional term life insurance. Though it may sound cut and dry to receive all the premiums you paid back, you would only receive back what you paid. In contrast, if you had a less expensive traditional term life insurance plan, you could pay significantly less in premiums and instead invest the amount you would have otherwise put into a ROP rider. At the end of your policy term, you may have earned more money with these outside investments than the ROP rider could have provided.
Advantages of ROP Life Insurance
- None of your paid premiums will be “forfeit.” If you have good reason to believe that you will outlive your term policy, you may purchase a 20-year term and know that at the end of the term, you can recoup exactly what you paid to keep the policy active.
- You will have a forced savings vehicle. With a ROP rider, you will effectively have a way to save for the future when your term ends and you receive all your paid premiums back in one lump sum. This can make it easier for some to save as it is hands-off.
- The price is higher than traditional term insurance, but still generally less than a permanent policy. This give the policyholder some guarantee on a return on their money and still may be a more affordable policy than a permanent one.
Disadvantages of ROP Life Insurance
- You must cancel the policy to get the premiums returned. This could mean that you receive a check back for your premiums, but if you do not plan ahead to get other coverage in place before your term ends, you could be left without any life insurance coverage.
- The ROP rider has specific terms that must be followed to receive the premiums back. If you do not follow these terms, cancel the policy early, or allow the policy to cancel for non-payment, you will likely not receive any return of your premiums. This holds true even if you paid the higher rate diligently up until the last payment was due.
- The price of a ROP policy will be higher than a traditional term policy. Although a ROP is generally less than a comparable permanent policy, they are still usually more pricey than a traditional term. The extra cost could be better spent in an investment vehicle rather than the forced savings of the policy.
How to Buy a Return of Premium Rider
Some companies offer stand-alone ROP policies, meaning that they do not need a rider to return the premium at the end of the term as the entire policy is structured in that manner. These could be called “return of premium life insurance.”
However, some companies only offer a traditional term policy with an ROP rider. Whether you are considering a ROP rider or stand-alone policy, it is important to carefully read and understand the full terms of the policy or rider. Not doing so may result in you losing out on a refund of your premiums.
Look at the insurer’s overall reputation for customer service, the policy’s coverages to ensure it suits your needs, and how much adding the ROP would affect your monthly rate. If the added cost is significantly higher, consider whether you may be better served purchasing a traditional term life insurance policy and investing the extra cost instead in an outside investment vehicle.