Term life insurance is simple: if you die, your beneficiaries get a death benefit, and if you don’t, you lose the money you pay in premiums. A return-of-premium (ROP) rider refunds the premiums you pay if you’re still alive at the end of your term. But it’s expensive, and you might earn more by stashing your money elsewhere.
A return-of-premium rider is an add-on to a term life insurance policy that refunds the premiums you paid if you outlive the policy. And the payment isn’t taxed.
You’ll typically receive 100% of the premiums, plus the fee you paid to add the rider to your policy. The refund might not include the cost of any additional riders or administrative fees you paid to maintain your policy.
How does a return-of-premium rider work?
This rider essentially reimburses you if you live longer than your term life policy.
Let’s say you purchase a 20-year term life policy with a return-of-premium rider, and pay $100 a month in premiums. If you die during the term, your beneficiaries will receive a guaranteed death benefit. But if you’re still alive after 20 years, your insurer will likely reimburse you $24,000 for the premiums you paid.
To compare, you won’t get any money back when your standard term life insurance policy expires. If you still need coverage, you’ll need to purchase a new policy out of your pocket — and your premiums will be more expensive now that you’re older.
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The costs vary, but the convenience of a ROP rider comes at a high price. You can expect to pay around 30% to 50% more in annual premiums to add a return-of-premium rider to your term life coverage, which can add up to hundreds or even thousands of dollars over the life of your policy.
To get the best possible premium, compare return-of-premium policy quotes from a range of life insurance companies. Pros and cons of return-of-premium riders
Pros and cons of return-of-premium life insurance
You get your money back. If you outlive your policy, you’ll walk away with the money you paid in premiums.
The refund is tax-free. The payment you receive from your insurer isn’t taxable.
It’s expensive. You might pay up to 50% more to add this rider to your policy.
Doesn’t earn interest. The money will be returned to you without any interest paid.
Must maintain coverage for the entire term. If you cancel your policy before the end of the term, you might not get a refund of any premiums you paid.
Rare rider. Some of the biggest life insurance companies don’t offer return-of-premium riders.
Can I buy a return-of-premium life insurance policy?
Possibly. While many insurers offer return-of-premium riders, and a handful of carriers sell standalone return-of-premium life insurance policies that build cash value. These include:
Mutual of Omaha
With these term life insurance with return-of-premium policies, a portion of your premiums is invested so your policy becomes a cash asset over time. Once you’ve accumulated enough cash value, you can begin to take out loans against the policy. But if you outlive the policy and haven’t paid back those loans, the insurer will dock that amount from your refund.
While a tax-free refund sounds appealing, remember that it’s not “extra” money — it’s money that you already had. If you’re interested in boosting your savings for retirement, you might be better off putting your money in a high-yield savings account or another investment option.
If you can afford the higher premiums and want to turn your life insurance policy as a simple, forced savings vehicle with a death benefit, a return-of-premium policy could work. However, if you’re a budget buyer, it might not be the best option.
Find a life insurance policy that offers a return-of-premium rider
Can I convert my policy if I have a return-of-premium rider?
It depends on your insurer. If your term life policy also has a conversion feature, you should be allowed to convert your coverage to a permanent policy. You’ll need to do this before a deadline, which is usually within five years of taking out your policy, or before your 65th, 70th or 75th birthday.
Alternatives to return-of-premium life insurance
If a return-of-premium policy or rider isn’t quite right for you, explore these options:
Term life insurance. The simplest and cheapest policy, term life insurance is sufficient for most people. It provides protection for a set period of time — like 10, 20 or 30 years — and pays a lump sum to your beneficiaries when you die.
Whole life insurance. A type of permanent life insurance, whole life policies offer lifelong coverage and have a cash value component. While the returns are guaranteed, these policies can be expensive.
High-yield savings account. An account that earns much higher interest rates than a traditional savings account. You won’t have a death benefit, but you’ll build interest on any cash you save over time.
A return-of-premium rider seems like a great deal at first glance, but it’s an investment in itself. To decide whether it will be a good fit, consider your budget and whether your policy has a conversion feature that will allow you to upgrade to permanent coverage.
Katia Iervasi is a staff writer who hails from Australia and now calls New York home. Her writing and analysis has been featured on sites like Forbes, Best Company and Financial Advisor around the world. Armed with a BA in Communication and a journalistic eye for detail, she navigates insurance and finance topics for Finder, so you can splash your cash smartly (and be a pro when the subject pops up at dinner parties).
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