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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.
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.
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
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:
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.
It depends on your financial situation. Getting your money back is great — especially since you don’t have to pay taxes on 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.
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.
If a return-of-premium policy or rider isn’t quite right for you, explore these options:
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.
Before you settle on a policy, compare your options with our comprehensive guide to life insurance.
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