Return of premium life insurance explained
Return of premium (ROP) life insurance, is a type of term policy that refunds all your premiums at the end of the policy period if you are still alive. So if you were to make all of your premium payments and live through the entire term of the policy, the life insurance company would refund you the amount you paid in premiums. For example, if you paid $20,000 in premiums over the life of your 30-year term policy, the company would return $20,000 back to you at the end of the term as stated in your policy.
But what if something happens to you during the term while your policy is still active? If you were to die during the policy's term, your beneficiaries will receive the full death benefit of your policy. However, there are some companies that may only pay a partial return of premium if you were to cancel your policy before the end of the term, while others will pay nothing.
How return of premium life insurance worksWhile the idea of getting a refund on your premium dollars may sound attractive, ROP life insurance works a bit differently than a typical term life policy. First of all, you'll pay for this added protection by way of more expensive premiums. Some life insurance companies offer stand alone ROP policies, while others provide this type of coverage by way of a policy rider.
The main benefits of ROP life insurance include:
- Term life insurance coverage with the ability to get a refund of your premiums
- A lump sum payout that is not taxed
The main drawbacks of ROP life insurance include:
- It typically costs much more than traditional term life insurance
- Because coverage costs more, you may not be able to afford as much life insurance to cover your needs
- Cancelling your policy or failing to make payments before the term expires, could result in losing your refund
- Having a temporary policy means that when the term is up, you'll need to buy additional life insurance based on your current age and health status (versus locking into a permanent* life insurance policy)
Life insurance is one of those things you pay for and hope to never have to use. And for this reason, ROP life insurance may seem like a good way to go. However, if you're considering ROP life insurance, talk with a qualified life insurance professional to learn more about this type of policy and determine if it's right for you. You might discover that having a permanent policy, such as a universal life or whole life, is a better choice with its cash-value earning potential and lifetime of coverage.
Because life insurance is a long term investment and commitment, it's important to take the time to understand how different policies work before making a decision.
*As long as required premium payments are timely made.