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Return of Premium Life Insurance

Researcher & Writer
April 08, 2020

When choosing a life insurance policy there is one huge decision that affects everything thereafter - term life or permanent life insurance? Of course, there are benefits and drawbacks to each type of coverage.

However, the biggest drawback when it comes to term life insurance is that it ends and you either have no coverage or you have to pay more for coverage in the future if it is still required. To counteract this somewhat, many people choose return of premium rider on your life insurance policy.

In the following article, we will address the pros and cons of return of premium life insurance (ROP), define what it and the ROP rider is, and give some examples of when it might be a good or bad choice.

What Is Return of Premium Life Insurance?

Return of Premium Life Insurance DEFINITION: a life insurance policy that returns all of your premiums upon the end of the term.

Return of Premium (ROP) Rider DEFINITION: a life insurance rider attached to the policy that allows all premiums to be recaptured upon the end of the policy's term.

While some companies offer a dedicated Return of Premium life insurance policy, others will include it as part of the company's life insurance riders on a regular level term policy.

In its basic form, return of premium life insurance is simply level term life insurance with an ROP rider attached to it.

In truth, the name sums it up very well because, when this rider is included in a term life policy, it will see all of the premiums paid returned to the policyholder if they outlive the policy.

Considering outliving a term life policy is one of the biggest concerns, the rider negates this worry because you will receive all of your premiums back once the policy is over.

Typically, you will receive 100% of your premiums and it will be completely free from tax as it doesn’t qualify as income. If you pay $40 per month over a period of ten years (120 months times 40), you will receive $4,800 if you are still alive once the policy's term comes to an end.

If you were to forgo this option, you would simply lose all of your premiums when the policy expires so it is an important consideration to make.

If we are going to assess it fairly, the only way we can do so is to look at the return of premium rider pros and cons. Then, you can see whether they apply to you and how you would be affected both now and in the future.

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Advantages of Return of Premium Term Life Insurance

The pros of return of premium life insurance are pretty straightforward.

Return of Principle

As obvious as it sounds, this is in fact the biggest benefit of all. When your term life policy expires and you don’t have this rider or feature included, you are left with no returns and you have to find yourself a new policy at a higher price. When the rider is attached, you receive all of your premiums so nothing has been lost. Essentially, this is a refund for however many years of premiums paid. 

If you are still relatively young and planning to outlive the policy, it makes sense to get your money back if you don’t use the insurance, right? When you have this feature ready and waiting for when the policy expires, you are reducing your risk significantly and it makes your decision to go for a term life policy seem more sensible.

Disadvantages of return of premium life insurance

On the flip side, there are some drawbacks or cons to return of premium life insurance policies and riders. As we know, life insurance is a unique experience so there are certain audiences that would not benefit from a policy like this.

Higher Cost

For many, life insurance is all about the cost, as most people want cheap life insurance. If that is the case with you, then ROP life insurance is not going to be the right fit.

These policies are more expensive then a typical term policy, including no exam term life insurance.

If you add the rider to a term life policy, you will see a marked difference in your premiums, typically around 3 times as much, so this is a consideration that needs to be made.

If the return of premium life insurance quotes are simply too much for you to justify choosing this type of life insurance policy, you might find it more beneficial to put that money to other use.

No profit

In addition to this, you will only get your premiums back when the policy expires.

What does this mean? Ultimately, you will only see whatever you have paid into the policy so it is like a refund.

Unfortunately, some time will have passed since you paid this money and it is likely to be worth less that it was when you paid it. As inflation occurs and the cost of living increases, the $4,800 we discussed earlier won’t buy as much as it would have done at the beginning of the policy. The time value of money says that a dollar today is worth much more than a dollar in 30 years.

With this in mind, it isn’t actually a very good tool if you are looking for an investment project. Instead, you would be better off paying for a standard term life policy and then investing the difference.

Alternatively, you might want to look into cash value life insurance, if you want to get a guaranteed rate of return on your money, plus potential dividends.

When push comes to shove, it all comes down to security and the risk you are willing to take. If you would rather have all of your money in one place with a guaranteed return or premium (assuming that you outlive the policy and pay the premiums), the Return of Premium life insurance rider might make sense.

Limited options

Finally, we should also point out that you could be limiting your options by deciding to go for a policy with this feature.

Not every insurance company offers Return of Premium as a policy or even as a rider. Even when companies do put this in place, they might restrict other areas of the policy such as the coverage length or minimum coverage amounts.

Return of Premium Term Life Insurance Companies

The following companies specialize in term life insurance with ROP riders. The return of premium rider is not available with all companies in all states.

American General (AIG)

Select-A-Term ROP
  • Available for ages 20-55 (depending on term length)
  • 20 year term minimum
  • 35 year term life insurance maximum
  • Conversion option by age 70 to permanent life insurance
  • Renewable to age 95
  • Policy loans available on cash value

Read more about the company in our American General review.

Assurity

Term 350 Plus ROP
  • 20 year and 30 year plans
  • Ages 18-60 depending on term length
  • Simplified issue term life with return of premium rider
  • Conversion option by age 65 to permanent life insurance

Read more about the company in our Assurity review.

Mutual of Omaha

Term Life Express ROP
  • 20 year and 30 year plans
  • Ages 18-50 depending on term length
  • Simplified issue term life with return of premium rider
  • Conversion option by age 70 to permanent life insurance

Read more about the company in our Mutual of Omaha review.

Final things to consider 

Before we leave you to your research, we would just like to point out a few considerations that you will need to make:

  • You lose some flexibility when you choose Return of Premium. At some point during your coverage, you are likely to see a much better deal elsewhere. However, you cannot act upon this because you would have been paying a high premium just to have them returned at the end. When the rider or feature is not employed, you can change provider without worrying about what you might be losing.

Whenever you invest money in an insurance policy, bank, stock market, or even when you buy some fruit from the grocery store, there is always an ‘opportunity cost’. When you spend some of your hard-earned money, opportunity cost describes the fact that the same money could have been used elsewhere, and to potentially better use.

When deciding whether or not to go for the Return of Premium life insurance, there will be an opportunity cost because you could invest this money elsewhere to see a potentially larger return. Once again, this comes down to risk and security and we are all different in this regard.

Ready to learn more about your options?  Give us a call today or visit our Life Insurance Quotes page and start comparing rates!

Written by
TermLife2Go
We are a team of life insurance experts with the simple mission of helping you find the best coverage for your unique situation. We research, review, and rank life insurance companies to make that process easier.