What Is a Return of Premium Rider?
A return of premium rider is an optional feature that can be added to term life insurance policies. It allows policyholders who outlive their policy’s term to receive some or all of the premiums they had paid into the policy. 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.
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The Promise of Money Back On a Return of Premium Rider
A return of premium rider — also often called an ROP rider or return of premium life insurance — is important because it provides a way for individuals to recoup their financial investment in a life insurance policy if they outlive the term of the policy. Typically, if you outlive your term policy’s term, your policy would expire and you would not receive any of the death benefit or premiums paid back. The ROP rider ensures that if you outlive your policy, you would receive all premiums paid back.
However, the premiums for a policy with this rider are typically higher than for a policy without the rider, so it is important to carefully consider the costs and benefits before making a decision.
How Return of Premium Riders Work
Standard term life insurance policies do not provide premium refunds even if the policyholder lives past the policy term, and beneficiaries will only receive the death benefit if the policyholder dies during the active policy term. If the policyholder outlives the policy term, the death benefit payment will not be given to anyone. However, with a return of premium rider, the policyholder may receive some or all of their premiums back if they outlive the policy term.
How Much Will You Get Back?
Depending on your policy’s details, you may receive every dollar you paid into your premium along with any fees paid, or only the premiums you paid minus fees, or only part of the total premiums you paid.
For example, say you purchased a 20-year term life insurance policy with a return of premium rider, and your premium to keep the policy active was $75 per month. If you are still alive at the end of the 20th year, you could be reimbursed for $18,000 because you paid $75 per month for 240 months.
Criteria For Premium Reimbursement
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, any premiums you paid will not be returned. There may also be limits to how often you can miss payments. For example, you may not be allowed to miss any payments at all, or are only be allowed to miss a certain amount during the entire term.
Keep in mind too that some insurance companies have a window during which policyholders must officially cancel their policy to be eligible for the premium return. For example, you may need to contact your insurer within 12 months of your policy term ending to notify them that you want to activate your rider. This means if you wait until the 13th month before reaching out, you may forfeit the reimbursement altogether.
Return of Premium Riders vs. Standard Life Insurance
|Return of Premium Life Insurance||Return of Premium Life Insurance||Standard Permanent Life Insurance|
|Premium cost||Higher than comparable term life policies; lower than permanent life policies||Lower than ROP and permanent life policies||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|
Return of Premium Life Insurance vs. Standard Term Life Insurance
For the most part, return of premium life insurance functions the same as standard term life insurance. Like with standard term life insurance, you select your coverage level and term length when you first purchase a policy. You then pay monthly premiums to keep your coverage active. If you pass away before your policy term ends, your beneficiaries would receive a death benefit.
However, unlike standard term life insurance, if you outlive your return of premium life insurance term, you would be reimbursed for the premiums you paid according to your policy’s details. You would not receive reimbursement with a standard term life insurance policy. However, it should be noted that adding this rider to a term policy typically makes policy premiums significantly higher.
Return of Premium Life Insurance vs. Standard Permanent Life Insurance
Return of premium riders are only available for term life insurance policies. However, some permanent life insurance policies may feature a similar rider or endorsement that guarantees some premium reimbursement if the policyholder chooses to surrender their policy.
Unlike return of premium life insurance, permanent life insurance has no term and instead provides coverage for the policyholder’s entire life. Many permanent policies also accumulates cash value that the policyholder can access during their lifetime, which can be used to as supplemental income, as a policy loan, or to help pay for upcoming premiums. Return of premium life insurance, on the other hand, does not accumulate any cash value.
However, the trade-off for not having to renew your coverage and for the cash value component is that permanent policies are usually significantly more expensive than term policies of comparable coverage amounts.
How Much Do Return of Premium Policies Cost?
When looking to purchase a term policy with a return of premium rider, policyholders can expect the ROP policy to be higher than a standard term policy. In fact, it can add anywhere between 30% more to being two to three times costlier for the entire policy term.
As an example, consider the average premium rate of $20 per month for a healthy individual in their mid-20s purchasing a 10-year term with $250,000 of coverage. For that individual, a return of premium insurance policy for the same term length and coverage could range from $26 to $60 per month.
Advantages and Drawbacks of Return of Premium Insurance
A ROP policy guarantees that policyholders will receive some or all of their premiums back. However, consider both the advantages and drawbacks of this type of insurance before deciding whether it is something that would suit your needs.
Advantages of ROP Life Insurance
- You can avoid “forfeiting” your premiums. This is the key feature of return of premium riders. If you outlive your policy term, you can be reimbursed for all the premiums you had paid into the policy. This could be a significant sum that would come back to you instead of disappearing with the end of your policy term.
- You will have a forced savings vehicle. With a ROP rider, you will effectively have a way to save for the future because you know that when your term ends, you receive your paid premiums back in one lump sum. This can make it easier for some to save as it is hands off and mandatory to keep your policy coverage active.
- You would pay less than a permanent policy. Permanent life insurance costs more than return of premium term life insurance. This makes it more feasible to afford necessary life insurance coverage.
- Someone — whether your beneficiaries or you — will benefit whether you outlive the term or not. If you pass away before your term is over, your beneficiaries receive the death benefit assigned to your policy. If you outlive your term, you receive a lump sum of what is typically thousands of dollars, which you can use however you see fit. Either way, someone you care about will ultimately benefit from the policy.
Disadvantages of ROP Life Insurance
- You cannot renew the policy or convert it into a whole life policy. To get reimbursement for your premiums, the policy has to definitively end. This means you must purchase another policy and potentially undergo medical underwriting again to avoid a lapse in coverage. You cannot take advantage of a term-to-permanent life insurance conversion, which could keep premiums lower overall.
- There are higher premiums. A return of premium life insurance policy can cost anywhere from 30% more to two to three times as much as a standard term life insurance policy. This means maintaining coverage month after month could be significantly more expensive.
- There are specific terms you must follow to receive the premiums back. If you do not follow these terms, you will likely not receive any reimbursement for your paid premiums. This holds true even if you paid diligently up until the last payment was due, depending on the terms you must follow.
- You may be better off investing the extra cost of the premium. You would receive all of your premiums back at the end of the term because it acts like a savings vehicle. However, that amount would never change over time. Instead, the extra cost could be better spent in an investment vehicle where it can at least earn interest rather than the forced savings of the policy.
- There are still cancellation fees. If you decide to cancel your policy before it ends, you will likely have to pay fees and would not get any of your premium payments back.
Should You Consider a Return of Premium Rider?
Consider a Return of Premium Rider If…
- You have good reason to believe that you will outlive your term policy, such as if you are young and healthy.
- You would like a guarantee that you will receive some or all of your premiums back.
- You want life insurance coverage to benefit your loved ones, but also a fall-back plan if you outlive your term.
- You can comfortably pay the higher premium throughout the entirety of the term.
Consider a Standard Term Insurance Policy Instead If…
- You are looking for an affordable way to protect your loved ones with your life insurance coverage.
- You would like to eventually renew or convert your term life insurance to avoid the higher cost of buying an entirely new policy.
- You are comfortable spending the extra cost of premium in an investment vehicle instead to get a better rate of return.
- You are looking for a policy with less rigorous criteria when it comes to missed payments and canceling coverage.
How to Buy a Return of Premium Rider
Buying a life insurance policy with a return of premium rider option generally falls into these steps:
- Explore your options. Some companies offer stand-alone ROP policies as return of premium life insurance. These policies do not need a specific rider. Other companies offer offer standard term life insurance with the option to add on a return of premium rider. Research on your own or get in touch with an agent to review your options.
- Compare quotes. Using the same coverage criteria, get quotes from the companies that you are considering, as premium prices can range widely.
- Compare policy terms. 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.
- Make your decision. After looking over quotes, policy terms, and other details like the insurer’s overall reputation for customer care, make your selection and apply.
If you already have an existing term life insurance policy, you could contact your policy’s carrier and ask about return of premium rider options. Note that not every insurer offers this rider, so if it is an important feature to you, speak with your insurer or work with a trusted life insurance agent to find a plan that has it.
Putting It All Together
The return of premium rider can be an attractive feature to those who want to insure that they will get something back if they outlive their term life policy. For example, if you have a 20-year term policy with a ROP rider, at the end of the 20th year, you can cancel the policy and get reimbursed for some or all of the premiums that you have paid into the policy.
However, this feature comes with higher premiums. With a standard 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.
But this return on investment is not guaranteed, whereas if you adhere to your return of premium’s rules for the duration of the term, you are guaranteed the amount you paid on your premiums back.