What Is a Return of Premium Rider?

Who should consider a return of [ rider?

A return of premium rider might sound like a great idea since you’ll enjoy the peace of mind of term life insurance, but also be able to get your money back if you outlive your policy. But it may not make financial sense for a number of reasons, which is why not all insurance companies offer it.

Here’s  an example. Let’s say that you were to purchase a 10-year term life insurance policy for around $50 per month and you end up outliving the term of the policy. With a return of premium rider in force, you would receive around $6,000 in premiums paid back to you (tax-free!). 

This can be helpful if you decide at that point that you want to continue having life insurance coverage as the lump sum could be applied to a new policy. Since getting another policy when you are older will likely be more costly, getting this premium back can be helpful. Of course, you can use your returned premiums for anything you want.

Some potential candidates for a return of premium rider include:

1. Young and healthy people: Generally speaking, if you are still relatively young and healthy (and therefore more likely to outlive a term life policy), this type of rider could help you recoup some of the cost of carrying insurance. As a result, instead of feeling as though you are throwing money away, by paying an additional fee for the rider, you’d be ensured that you’ll receive some of your money back when your policy expires. 
2. Individuals seeking investment-like benefits: People who want to have a form of forced savings or investment with their insurance policy may find return of premium riders attractive.
3. Risk-averse individuals: If you want the security of knowing you can get your money back if you don't end up using the insurance benefits, you might find ROP appealing.

One thing to keep in mind, though, is that you will pay  additional fees if you have a return of premium rider, and that cost is typically not refunded. In other words, you won’t be getting back every dollar you pay out. Should you consider this type of policy supplement, check the specifics of your policy. It should indicate the exact amount that would be returned if you survive the policy.

The other major catch: Adding on a return of premium rider will significantly raise the price of your term life insurance premium (typically, around 30% more). This extra monthly cost could put a strain on your monthly budget, and may prevent you from exploring other investment opportunities.

In fact, one of the key reasons why people seek term life insurance is because it’s more affordable. If you’re willing to spend extra, then you might be better served by whole life policies that accumulate cash value in addition to the death benefit.

How Does This Rider Work?

Think of a return of premium rider as insurance on your insurance. Of course, having life insurance is important for the financial security of your family. On the other hand, what if you paid for life insurance that you ended up not needing in the end? For most people, just knowing that their loved ones have coverage for the duration of the term makes life insurance worthwhile – even if they can’t get any of that money back. With a return of premium rider, though, you’re guaranteed to receive a portion of your money back as a refund. However, don’t forget that this money won’t be returned to you until your policy expires.

Pros and cons of return of premium riders

Pros

1. Premium refund: The main advantage is the potential to receive a refund of premiums paid if the insured outlives the policy term. This can provide a sense of financial security and can be seen as a return on investment.
2. Forced savings: ROP can serve as a form of forced savings, ensuring that premiums paid into the policy are not lost if the insured event doesn't occur.
3. Flexibility: It offers flexibility by combining insurance coverage with a savings component, which can appeal to those looking for a dual benefit.

Cons

1. Higher premiums: Policies with an ROP rider typically have much higher premiums compared to those without it. This can make it more expensive upfront.
2. Opportunity cost: The money tied up in premiums might work better if they are invested elsewhere for potentially higher returns. ROP riders often have lower returns compared to other investment options.
3. Policy limitations: There may be specific conditions and limitations on when and how the ROP is paid out. For example, some policies may require the policy to be kept in force for a certain number of years before the ROP is available.

Alternatives to ROP riders

If your preferred insurance carrier doesn’t have an ROP rider option, not to worry. There could be better options as to how to use the funds you will save by just getting a regular term life policy. These include:

1. Term life insurance with separate investments: Instead of purchasing a life insurance policy with an ROP rider, you could opt for a regular term life insurance policy and invest the difference in premiums into separate investment accounts such as mutual funds, stocks, bonds, or retirement accounts like IRAs or 401(k)s. This approach allows you to have the protection of life insurance and the opportunity for higher returns.
2. Permanent life insurance: Permanent life insurance policies, such as whole life or universal life, accumulate cash value over time, which can be accessed through policy loans or withdrawals. While these policies typically have higher premiums compared to term life insurance, they provide a death benefit as well as a savings component. While you don’t get your premiums back, you may have the option to borrow from the cash value of your policy. 
3. Employer-sponsored retirement plans: If you have access to an employer-sponsored retirement plan such as a 401(k) or 403(b), you could increase your contributions to these accounts using the funds that would have been spent on ROP rider premiums. Many employer-sponsored plans offer tax advantages and employer matching contributions, making them attractive options for long-term savings and retirement planning.

Each of these alternatives has its own set of advantages and disadvantages, so it's important to carefully evaluate your financial situation, investment goals, risk tolerance, and time horizon before making a decision. Consulting with a financial advisor can also provide valuable guidance in selecting the most suitable option for your needs.

What Else Should I Know?

Whether or not a return of premium rider is something you wish to look into, don’t overlook the main benefits of a regular term policy. It’s an affordable way to protect the financial stability of your loved ones—no matter what life throws your way. And, because it is usually the most affordable type of life insurance, it allows you more flexibility in your budget to work toward other investment goals. 

You can get a quote from Ethos and apply online. One of our agents will help you find the policy that works best for you and your budget.