Return of Premium Life Insurance

• Return of premium life insurance (sometimes called ROP term) refunds premiums if you outlive your term policy. It’s not available for permanent policies, as those are designed for lifetime coverage.
• It isn’t a savings or investment feature, refunds are only given if the insured survives the full term.
• May be offered as a stand-alone policy or as a rider.
• Deciding if it’s worth it depends on your budget, goals, and comfort with higher premiums.

These types of term life insurance policies are a kind of term coverage offered for a set period of time (usually 10 – 30 years). Like standard term, you select the length of coverage and a death benefit amount that fits your needs, and make regular premium payments. If the insured person dies during the term, the beneficiary receives the payout. What makes this option unique is the potential refund of premiums if the insured person outlives the policy.

By definition, ‘return of premium’ is what sets these policies apart, and this refund is appealing to many people. You’ll pay higher rates than you would for regular term life, and if you live through the entire term, the insurer returns the premiums you paid in. This essentially means the life insurance company reimburses your costs. If you die during the term, the death benefit is paid to your beneficiaries as with any term policy.

It’s important to understand that refunds typically don’t include interest, and may have tax considerations. You should consult with a tax professional before purchasing an ROP term policy to understand tax implications.

Read: Can You Have Multiple Life Insurance Policies?

Return of premium life insurance can sound like a good idea, but the higher cost means it isn’t right for everyone and some people may choose to pay a higher premium for permanent protection instead. Here’s a quick look at the main trade-offs:

Functionally, the return of premium life insurance works like a standard term. You choose your term period and your coverage amount. You’re protected for a set number of years, and if you die during that period, your beneficiaries receive the death benefit. The difference is what happens if you outlive the policy. Standard term life ends with no payout, while the return of premium benefit means you get your money back. The trade-off is that ROP policies cost considerably more than traditional term life.

Read: What Are Living Benefits of Life Insurance?

ROP life insurance is substantially more expensive than standard term coverage. The extra cost reflects the insurer’s obligation to refund your premiums if you outlive the policy.

You can expect to pay up to five times more* for return of premium term as opposed to a traditional level term policy.

This higher premium is the main trade-off. While you get money back at the end of the term, you’ll pay much more along the way.

Because premiums are so much higher, many people compare ROP term to permanent life insurance coverage. If you’re already paying significantly more, whole life insurance or universal life insurance might provide better long-term value by offering lifelong protection and cash value, rather than just a refund at the end of a term, especially since most returned premiums don’t include interest.

There are two main ways people purchase return of premium term life insurance:

• Standalone return of premium term policy: Some insurers design a policy that includes the refund feature from the start. You choose a term length, pay higher premiums than you would for standard term, and receive your premiums back if you outlive the policy.
• Return of premium rider: Other insurers sell a regular term policy and let you add a rider that provides the refund feature. The rider increases the premium but works the same way, if you outlive the policy, your payments are returned.

In both cases, the cost is higher than standard term life, and the refund typically doesn’t include interest. Also, it’s important to know that most riders can only be added at the time of purchase (including ROP).

Read: Life Insurance Policy for Parents

Whether the return of premium life insurance makes sense depends on your goals and budget. Some people like the idea of getting their money back, while others find the higher premiums hard to justify compared to regular term coverage.

How to Decide If It’s Right for You

• Worth considering if: You want term protection, can comfortably afford higher premiums, and like the idea of a refund at the end of the policy.
• May not be a fit if: You’re focused on the lowest-cost coverage, prefer flexibility, or would rather invest the difference elsewhere.
• Compare to permanent coverage: Since return of premium life insurance costs much more than standard term, some people instead put those higher premiums toward a permanent policy. Whole life or universal life may provide lifelong protection plus cash value, making them a better fit if you want coverage that lasts beyond the term.
• Other considerations: ROP policies and riders aren’t always widely available, and not every insurer offers them.