Share on facebook
Share on twitter
Share on linkedin

Return of Premium Life Insurance – The Good, the Bad and the Ugly

You may have heard of this type of term life insurance.  Known as “Return of Premium” coverage (ROP in industry parlance), it purports to return all of the premiums to the Insured (or the Owner if different) at the end of the term.  We are going in for a deep dive into this type of term life, the pros and cons and especially who might benefit the most from it.

The Good

You get your money back at the end of the term.  Unlike conventional term life, where the premium payments go entirely to the cost of insurance and are non-refundable at any time, ROP allocates additional premiums that at the end of the term are refunded entirely including the premiums used to cover the cost of insurance.  In select cases that we will review later in this post, that can be highly beneficial.

In the event of death of the insured, the face amount of the certificate (death benefit) is naturally paid out.  Some insurers have riders that would be of additional benefit in the event that the insured should become disabled or critically ill.  See our post on riders for more on this topic.

Lastly the policies have conversion options that for a variety of reasons may be exercised.  A conversion is where a policy of one type is converted to another type with different rules for underwriting, premium adjustments and application of earlier premiums paid to the new policy.

The Bad

It’s quite costly.  The obvious first detriment to this type of life insurance is that it’s significantly more expensive than traditional term life.  In addition, this option is not available in terms under 15 years that we are aware of.  Given that most term life is purchased to replace assets or lost income, that is not unusual.  It does however raise questions.  Let’s look at an example.

We find that most income replacement and asset protection (like mortgage coverage) fall into 20-year terms.  Taking the example of an aged 39, male non-smoker whose health can be rated as “standard”, for $250,000 in coverage, the monthly premium payments range from $112 – $125.  Peeling back to a 15-year term increases the payment to $180 plus.

In contrast, a 20-year term policy for the same person averages over a wide range of company options about $31/month.   A 15-year term is about $26/month, again over a wide range of options.  The additional cost ranges from $80 – $150 per month.  Over a term it looks like this:

Term (Years)

Monthly

ROP Monthly

Added Cost (AC)

AC/Term

15

$26

$180

$154

$27720

20

$31

$112

$81

$19440

Can These Additional Funds Be More Wisely Invested?

Remember, the ROP only returns the premiums paid and only entirely at the end of the term.  There is no interest paid and depreciation will devalue the money substantially over a 20-year term.  Assuming one has the disposable income to afford the additional monthly cost to begin with, one has to question whether or not it makes sense to essentially capitalize the insurer with an expectation at best of a negative return.

Pro Tip: Although you can compare ROP plans with traditional term life in our free quote tool, we also encourage permanent insurance as an alternative to Return of Premium.

The Ugly

You give up control of your money.  Allowing the insurer to use your money with no expectation of return should dissuade most reasonable people from these policies as we see it.  It is also essential to understanding how ROP works to acknowledge that the you only get all of the premiums back if the policy runs to full term.  If it is terminated for non-payment, dropped or in cases where policy loans are not repaid, the premiums may likely be returned only in part or even not at all.

Less likely is the potential for insolvency of the insurer.  The landscape for companies who offer these types of policies is limited and although the ones we are familiar have excellent stability, for the same reason we find term insurance a proper option, “Hey, you never know.”

So Where Does Return of Premium Life Insurance Fit?

Increasing longevity has brought down life insurance premiums in general.  There are life insurance solutions that can take the additional premiums that would be allocated to ROP and grow them (potentially greatly and tax free upon withdrawal), all the while providing a death benefit and the guarantees associated with life insurance.

As hard as we may try to find a place for ROP, we believe that the evolution of the industry has supplanted this type of coverage.  Compare yourself.  Our free quoting tool can give you options for term and ROP from a wide variety of top life insurance companies.  If you would like to speak with an agent about other forms of life insurance that have growth potential, we welcome the opportunity to be of service.

More good topics

Long Term Care Patient with Caregivers
Annuities
Joseph Leva

Long Term Care [An Essential Guide] Part I

With the aging in of the Boomer generation and longevity extending out as a result of medical advances among other things, the need for long term care (LTC) has grown. Yet of those who enter some form of long term care, only 14% have a planned vehicle

Read More »

This website uses cookies to ensure you get the best experience on our website.