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Is a return-of-premium rider worth it?
This rider may seem like a great deal, but its benefits may not beat out its price.
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.
What's in this guide?
What is a return-of-premium rider?
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 return might not include the cost of any additional riders or administrative fees you paid to maintain your policy.
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How does a return-of-premium rider work?
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.
The costs of a return-of-premium rider
This convenience comes at a price. You can expect to pay around 30% to 50% more in annual premiums to add a return-of-premium rider to your policy.
Pros and cons
Pros
- Money back. If you outlive your policy, you’ll walk away with the money you paid in premiums.
- Tax-free payment. The refund isn’t taxable.
Cons
- 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. Many of the biggest life insurance companies don’t offer return-of-premium riders.
Find a life insurance policy that offers a return-of-premium rider
Can I buy a return-of-premium policy?
Possibly. While many insurers stick to return-of-premium riders, a handful of carriers — like State Farm — offer return-of-premium policies that build cash value.
With these 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.
Is return-of-premium life insurance worth it?
It depends on your financial situation. Getting your money back is great — especially since you don’t have to pay taxes for it. But the upfront premiums need to fit within your budget.
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.
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.
Bottom line
A return-of-premium rider seems like a great deal at first glance, but the complexities around it prevent it from being an instant must-have addition. What you’re able to afford, if you can convert your policy and other such factors all play a part in how well of a fit it might be.
Before you settle on a policy, be sure to compare your options to make the decision that takes into account your family’s needs with our comprehensive guide to life insurance.
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