Introduction
Term life insurance premium return allows policyholders to repay all premiums if they outlive the coverage period. With this feature, also called return of premium (ROP), the insurance company refunds all premiums paid if the insured survives the entire term.
For example, if you pay $500 annually for a 20-year $100,000 term life policy, you would get back the $10,000 paid in premiums after 20 years if you were still living. This gives term life similar to cash-value properties as permanent life insurance.
This article explains how term life insurance premium return works, including how it compares to standard term life insurance. We also outline the key benefits and drawbacks, provide illustrative examples, and discuss what types of consumers can benefit most from this kind of policy.
Table of Contents
How Does Term Life Insurance Premium Return Work?
Term life insurance provides financial protection to your beneficiaries if you pass away during the policy coverage period. Here’s a quick overview of how standard-term life insurance works:
- You purchase a term life insurance policy for 10, 15, 20, or 30 years.
- You pay a monthly, quarterly, or annual premium to keep the policy active.
- If you die during the term, your listed beneficiaries receive the death benefit (policy face amount).
- If you outlive the term, the policy expires and provides no payout.
Term life insurance with a return of premium (ROP) rider works similarly but offers one extra benefit:
- If you survive the entire policy term, the insurance company returns all the premiums you paid over that period (less any policy fees/charges).
For example:
- You purchase a 20-year, $250,000 term life policy at age 30.
- Your annual premium is $300, so over 20 years, you pay $6,000 total ($300 x 20 years).
- If you pass away at age 45, your beneficiaries get the $250,000 death benefit.
- If you live beyond age 50 (the end of the 20-year term), you get back the full $6,000 you paid into the policy.
The returned premiums are not taxable since they refund the money you already paid.
ROP provides a “money-back guarantee” if you outlive the term length. This can make term life insurance more appealing to some consumers.
Benefits of ROP Term Life Insurance
ROP term life insurance provides two main advantages compared to standard term insurance:
Dual Protection
ROP term life gives you:
- Death benefit – Pays out to your beneficiaries if you die during the term
- Premium refund – Returns all premiums paid if you outlive the term
So it provides life insurance coverage and a “backup” cash payout.
Tax-Free Premium Refund
The premium refund you receive at the end of the ROP term is not considered taxable income. This is because it is simply a return of premiums you already paid.
Some key tax advantages:
- You don’t pay taxes on the lump-sum payout
- Refunds are not subject to income tax or capital gains tax
- Any interest earned on refund money is also tax-free
Builds Cash Value
Unlike standard terms, ROP policies build cash value over time that you can access in certain ways:
- Withdraw cash – Make withdrawals from the accumulated cash value
- Policy loans – Borrow against the policy using the cash value as collateral
- Surrender for cash – Cancel policy mid-term to collect cash value
So ROP term life offers options to access funds if you need them before the term expires.
The cash value comes from the premiums you pay over time. An ROP rider converts term life into a policy with cash value attributes.
Things to Consider Before Buying ROP Term Life
Before purchasing a term policy with a return of premium, it’s important to weigh the following factors:
More Expensive Premiums
- ROP term life premiums are higher than standard term policies.
- You’re paying for the premium refund benefit on top of the death benefit.
- An ROP policy may cost 2x to 5x more than regular term life.
For example, a 20-year $500,000 term policy for a 40-year-old may cost:
| Policy Type | Annual Premium |
|---|---|
| Standard term | $300 |
| ROP term | $1,500 |
So evaluate whether the ROP fits your budget and insurance needs.
Must Pay Premiums on Time
To receive your full premium refund:
- You must continue paying premiums on time without any lapses.
- If the policy lapses, the insurer may reduce or eliminate the refund.
Be sure you can make consistent payments for the entire ROP term.
Shop Around for Rates
- ROP premiums can vary significantly between insurers.
- Compare quotes from multiple companies.
- Look for an insurer with strong financial ratings.
Finding the right rate can save you thousands over the policy’s life.
Who Should Consider ROP Term Life Insurance?
ROP term life is best suited for certain individuals and financial situations:
Want Insurance Plus Cash Back
ROP makes the most sense for those who:
- Want life insurance protection for loved ones
- Also, they want the potential cash payout if they outlive the term
It provides both death benefits and premium refunds.
Uncomfortable With Premium “Loss”
Some view standard term premiums as money “lost” if they outlive the policy. ROP prevents this by returning premiums paid.
ROP is best for those uncomfortable about not getting any premiums back.
Can Afford Higher Premiums
Since ROP costs significantly more than the standard term, you must have the financial means to pay the higher premiums.
It works for individuals who:
- Are in a stable financial position
- Have disposable income to cover the premium difference
- Won’t be strained by the increased costs
The standard term may be better if higher premiums are unaffordable.
Pros and Cons of ROP Term Life Insurance
Pros
- Premium refund if you outlive the term: Get your money back if you survive past the term length. Provides a “backup” cash benefit.
- Refunds not taxed as income: Premium return paid out at the end of the term is not considered taxable. Avoid taxes on the payout.
- Can build cash value: ROP premiums you pay over time create a cash value fund you can access. Provides options if you need funds before the term expires.
Cons
- More expensive premiums: Costs significantly more than standard term life insurance, sometimes 2x to 5x as much.
- Risk of losing refund if lapse policy: Must continue paying premiums on time. Lapsed payments may lead to reduced or no refund.
So ROP term life provides unique advantages and drawbacks to consider carefully. Analyze your budget and insurance needs to decide if it is suited for your situation.
Features of ROP Term Life Insurance
Available Riders
ROP policies often allow you to add supplementary insurance riders for added protection:
- Critical illness rider – Pays out a benefit if diagnosed with a major illness like cancer, stroke, or heart attack.
- Disability rider – Provides income if you become disabled and cannot work.
- Accidental death rider – Extra death payout if you pass away due to an accident.
- Waiver of premium rider – Waives policy premiums if you become disabled.
Conversion to Permanent Life
Many ROP term policies allow you to convert to permanent life insurance within a certain period, such as before age 70.
This allows you to continue life insurance coverage past the term length.
Premium Payment Flexibility
ROP policies offer a range of premium payment options:
- Annual
- Semi-annual
- Quarterly
- Monthly (via ACH)
Choose the frequency that aligns with your budget and needs.
How to Shop for ROP Term Life Insurance
Follow these steps when evaluating ROP policies:
Compare Quotes from Multiple Insurers
- Get quotes from at least 3-5 different insurance companies.
- ROP rates can vary significantly between insurers.
- Online comparison sites like Policygenius can provide instant quotes.
Consider Your Budget and Goals
- Factor in your income, expenses, and financial goals.
- Make sure the ROP premiums fit within your budget.
- Align the death benefit and term length with needs.
Look for Highly-Rated Insurers
Prioritize insurers that:
- Have strong financial strength ratings from agencies like A.M. Best.
- Have a track record of reliable claims payments.
- Offer responsive customer service.
- Have been in business for several decades.
Read the ROP Rider Details
- Review the ROP terms and conditions thoroughly before enrolling.
- Understand exactly how the premium refund works.
- Ensure you can comply with the requirements to get your money back.
Taking the time to find the right ROP policy saves money and provides peace of mind.
Alternatives to ROP Term Life Insurance
Regular Term Life Insurance
- Much lower premium costs than ROP.
- If you outlive the term, it provides a death benefit but no cash payout.
- Sufficient for many families’ coverage needs at affordable rates.
Permanent Life Insurance
- Provides lifelong coverage as long as premiums are paid.
- Builds cash value that grows over time on a tax-deferred basis.
- Types include whole life, universal life, and variable life.
Final Expense Insurance
- Small policies that cover end-of-life costs like funerals, bills, and debts.
- It can be an instant issue without a medical exam.
- Plan options include funeral expenses, senior life, and burial insurance.
For many, a standard term life policy offers sufficient protection at the best value. But permanent life or final expense plans better align with specific needs.
Always compare your options before choosing an ROP term life policy.
Top 3 ROP Term Insurance Companies
State Farm
- One of the largest insurance companies in the US
- A.M. Best financial rating of A++ (Superior)
- Offers 10, 15, 20, and 30-year ROP term policies
- Policyholders get 100% of premiums back if they outlive the term
Banner Life
- Specializes in term life insurance
- A.M. Best rating of A+ (Superior)
- ROP options for 10, 15, 20, 25, and 30-year terms
- Returns 100% of premiums paid if insured outlives the policy term
SBLI
- Offers ROP term life for 10, 15, 20 and 30 years
- A.M. Best rating of A+ (Superior)
- Policyholders get back 100% of premiums at the end of the term period
- Low rates and financial stability as a mutual company
| Company | A.M. Best Rating | Policy Options | Return of Premium | Additional Information |
| State Farm | A++ (Superior) | 10, 15, 20, and 30-year terms | 100% if outlive the term | One of the largest US insurance companies |
| Banner Life | A+ (Superior) | 10, 15, 20, 25, and 30-year terms | 100% if outlive the term | Specializes in term life insurance |
| SBLI | A+ (Superior) | 10, 15, 20, and 30-year terms | 100% at the end of the term | Mutual company with low rates |
Frequently Asked Questions
What is a term life insurance policy with a return of premium?
A term life insurance policy with return of premium, or ROP, provides a death benefit if the insured dies during the term length. It also returns all premiums paid if the insured survives the entire term. This gives it dual benefits not seen in standard-term life insurance.
How much more expensive is ROP term life insurance?
An ROP term life policy often costs 2-5 times as much as a standard term policy. The premium return benefit increases the premium costs and comes at an additional expense.
What happens if I miss ROP premium payments?
If you miss payments on the ROP term policy, it could lapse, and you would lose eligibility for the premium refund at maturity. You must make timely payments without any lapses to receive the full return of premiums.
Conclusion
Term life insurance premium return rider provides a unique combination of death benefit coverage with a cash payout if you survive the policy term. Returning all premiums paid if the insured outlives the coverage period, ROP term life insurance offers policyholders greater incentives beyond pure life insurance protection.
However, the premium return feature comes at an added cost, with ROP term life premiums running 2-5 times higher than standard term policies. The money-back-guarantee may be worth this higher price for certain individuals, but regular term life may sufficiently meet coverage needs for many families.
Consider your budget, risk profile, and financial goals when weighing ROP term life vs. alternatives like standard term or permanent insurance.
Key Takeaways
- ROP term life returns all premiums paid if the insured outlives the policy term length. This provides a monetary benefit on top of the death payout.
- ROP term premiums are pricier than standard term since you are paying for the return of premium benefit. Evaluate if it fits within your budget.
- ROP builds cash value that you may borrow or withdraw. However, you need premium payments to ensure you get the premium refund.
- Good candidates for the ROP term include those wanting insurance protection plus guaranteed cash back and who don’t mind the higher costs.
- Compare ROP quotes and look for highly-rated insurers when shopping for policies. Also, consider alternatives like regular term or permanent life insurance.
Reference Lists
- RetireGuide. (2021, January 5). Return of Premium Life Insurance: How It Works, Pros & Cons. Retrieved from https://www.retireguide.com/life-insurance/term/return-of-premium/
- Investopedia. (2023, May 11). Term Life Insurance: What It Is, Different Types, Pros and Cons. Retrieved from https://www.investopedia.com/terms/t/termlife.asp
- Investopedia. (2022, December 1). Are Return of Premium Riders Worth It? Retrieved from https://www.investopedia.com/articles/pf/08/return-of-premium.asp
- Bankrate. (2023, May 9). Term Life Insurance. Retrieved from https://www.bankrate.com/insurance/life-insurance/term-life-insurance/
- Aflac. (2000, January 1). Return of Premium Life Insurance. Retrieved from https://www.aflac.com/resources/life-insurance/return-of-premium-life-insurance.aspx
- Forbes Advisor. (2022, April 14). What Is Return Of Premium Life Insurance? Retrieved from https://www.forbes.com/advisor/life-insurance/return-of-premium-life-insurance/
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