Traditional term life insurance is structured to provide affordable financial protection during your loved ones’ most vulnerable years. If you die during these years, the term policy is there to provide a lump sum death benefit to your survivors. If you outlive this policy, you are still around to provide for your loved ones, but you do not receive any money in return.
There is a term life insurance product, however, that you can purchase in which you would get money in return if you outlive the policy. This product is called Return of Premium Life Insurance and it’s exactly what it sounds like. If you outlive the policy, you are refunded all the premiums you paid tax-free.
How does return of premium term life insurance work?
As with a regular term life insurance policy, the premiums you pay are guaranteed to stay level for the entire term of your policy. However, the premiums for a return of premium (ROP) term policy compared to a regular term policy are much higher.
» Learn more: How Much Does Life Insurance Cost?
Consider the comparison quotes table below.
Estimated Monthly Cost of a 20-Year $500,000 Policy for a Healthy MaleAgeTerm PolicyROP Term Policy30$33.25$100.9935$34.13$107.7640$41.56$143.6145$52.50$192.7750$83.56$291.9855$135.63$443.2760$250.25$850.36
John Smith, a healthy 40-year-old husband and father, purchases a 20-year $500,000 return of premium term policy. This policy costs $143.61 each month.
If John dies prematurely within the 20-year period, the insurance company pays his beneficiary a benefit of $500,000.
If John is alive when his policy expires at the end of 20 years, the insurance company returns John’s paid premiums, a total of $34,466.40.
Return of Premium and Cash Value
Similar to a permanent life insurance product, some return of premium products generate a cash value. Typically, cash values don’t start to accumulate for a few years and it builds very slowly; however, every year the growth percentage increases.
Loans can be taken against this existing cash value, but there is interest that gets tacked on. As cash values accumulate in the policy, you also have the option to use these funds to pay the premiums; however, this is still considered a loan and the same factors exist.
It’s important to note that the cash value does not get added to the death benefit total. The table below shows an example of how the premium, cash value, and death benefit work with an ROP policy.
20-Year $300,000 Return of Premium Policy for a Healthy 35-Year-Old Male20-Year $300,000 Return of Premium Policy for a Healthy 35-Year-Old Male20-Year $300,000 Return of Premium Policy for a Healthy 35-Year-Old MaleTermAnnual PremiumCash ValueYear 1$805 $0 Year 2$805$0 Year 3$805 $0 Year 4$805 $0 Year 5$805 $600 Year 6$805 $600 Year 7$805 $1,315 Year 8$805 $2,152 Year 9$805 $3,030 Year 10$805 $3,949 Year 11$805 $4,914 Year 12$805 $5,925 Year 13$805 $6,986 Year 14$805 $8,099 Year 15$805 $9,268 Year 16$805 $10,496 Year 17$805 $11,787 Year 18$805 $13,147 Year 19$805 $14,580 Year 20$805 $16,094
If you die within the term and there is a loan against the policy, your beneficiaries will receive the death benefit minus the loan plus interest. If you outlive the policy, you’ll get refunded your paid premiums minus any loans plus interest.
If, for some reason, you decide to surrender the policy, you would not receive your premiums back, but you would receive the cash value, if any has accumulated, minus any surrender fees and any outstanding loans plus interest.
A return of premium policy can be a great option if you’re financially stable and don’t mind paying more for a guaranteed refund.
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When would a return of premium policy be a good option?
Regular term life insurance is the best option for most families because of how affordable it is; however, if you can afford to regularly pay the increased ROP premiums without fail, then it’s something to be considered.
» Calculate: Life insurance needs calculator
Below are some situations in which a return of premium term product may be a good decision.
ROP can be a good fit for divorced parents. When minor children are involved, the non-custodial parent is usually required to maintain life insurance for the benefit of the custodial parent and/or children. ROP may offer parents the opportunity to fulfill this life insurance support obligation and perhaps even get a full refund of paid premiums.
ROP can be a good fit for business partnerships. If the partners outlive the policy, the premium refund can be used to help fund a business buyout. If one of the partners dies, the death benefit can provide the necessary buyout funds.
If you are planning to pay for your child’s college tuition, an ROP policy can help. If you die during the term, the death benefit ensures your child can still afford college. If you outlive the policy, the refunded premiums can go toward paying off student loans.
Paying Off the Mortgage
An ROP policy can protect your loved ones and ensure they wouldn’t need to sell the home if you died prematurely.
For example, if you have a 30-year mortgage loan, you can choose to purchase a 30-year return of premium term policy. If you die during the term, the death benefit can help pay off the mortgage. If you outlive the policy, the refunded premiums can be used to remodel the house.
Another option would be to buy a return of premium term policy with a term shorter than the mortgage loan term. For example, if you have a 30-year mortgage loan, you can choose to purchase a 20-year return of premium term policy. If you die during the term, the death benefit can go toward the mortgage loan. If you outlive the policy, you can use the refunded premiums to pay off the mortgage early.
Dick and Jane Smith just purchased their first home. Their mortgage loan is for $300,000 with a 30-year term. They want to both own life insurance just in case one of them should unexpectedly pass away.
Dick is 35 years old, healthy and a non-smoker. He purchases a 20-year $300,000 ROP policy for $67.03 per month.
Jane is also 35 years old, healthy, and a non-smoker. She purchases a 20-year ROP policy for $60.82 per month. Note: Women pay less for life insurance than men (except for unisex laws in Montana) because statistically women live longer than men.
Should either of them pass away during the term, the surviving spouse can use the life insurance death benefit of $300,000 to pay off the mortgage. Plus, at the end of the surviving spouse’s 20-year term, he or she would receive all the premiums back that they paid.
If they both outlive their policies, not only can they celebrate being alive, they each receive a refund of all premiums paid. Dick receives $16,087.20 and Jane receives $14,596.80. They can then take this combined amount of $30,684 and put it toward their mortgage loan.A return of premium policy can be a great option if you’re financially stable and don’t mind paying more for a guaranteed refund. However, ROP isn’t the best choice for everyone and purchasing an inexpensive traditional term policy and investing that extra amount elsewhere might be the better option. Talk with a Quotacy agent if you’re unsure what type of policy is best for your situation.
» Compare: Term life insurance quotes
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