June 17, 2016 by Brad Gunning

What is Return of Premium Life Insurance?


Young couple purchasing life insuranceMedicareSupplement-300x38You’ve just had a baby, were recently married, or purchased a home. You make the responsible decision to buy life insurance. But what type? If you’re buying life insurance for one of the above reasons, we recommend term life insurance instead of whole life insurance. Once you’ve settled on an appropriate amount of life insurance coverage – in both amount and length of time – you’ve got one more important inquiry: should you consider return of premium (ROP) life insurance rather than straight term life insurance?

What is “Return of Premium” Life Insurance?

A return of premium (or ROP) life insurance policy provides coverage for a specified term and then refunds all premiums paid at the end of the term if the insured is still alive. It’s the ultimate case of betting on yourself. If you buy a ROP policy with a 20 year term and survive for those 20 years, not only did you protect your loved ones for 20 years, but in the end you didn’t end up paying anything for it.

Only Purchase a ROP Life Insurance Policy if You Need Life Insurance

Seems too good to be true, right? While on its surface a ROP life insurance policy is appealing, there are a few big caveats. First, you shouldn’t be purchasing ROP life insurance as some sort of an investment. You should only be considering purchasing ROP life insurance if you are actually interested in life insurance for its main purpose (ie, protecting your family financially). Only then should you debate between a traditional term life policy or ROP life insurance.

Don’t Purchase an Excessively Large ROP Life Insurance Policy

The next caveat is the amount of coverage you should purchase with a ROP life insurance policy. Because you’ll end up getting all of your premiums back, some folks end up purchasing a larger policy than they need. That’s not smart thinking, at least investment-wise. The extra premiums you’re paying for an excessive policy would be better off invested in a CD or annuity.

So the steps, in order, should be: (1) do I want a life insurance policy, (2) how much coverage do I want (term and amount), and only then should you ask (3) do I want traditional term life insurance or ROP life insurance?

Can You Afford a ROP Life Insurance Policy?

If you decide you’re interested in a ROP life insurance policy, a final consideration has to be the price. Because ultimately, assuming you survive, you’ll get back all of the money you spent on the policy once it expires, ROP life insurance costs more than term life insurance. You can expect to pay monthly premiums about double what you’d pay with term life.

So, for example, if you’ve decided you want a 30 year term life policy with $500,000 of coverage that might end up costing $33 a month. Can you afford to pay around $60 a month? Sure, it’s nice knowing if you’re around in 30 years you’ll be getting paid a pretty large lump sum of everything you’ve paid, but if you can’t afford $60 a month it doesn’t make much sense.

Examples of When a ROP Life Insurance Policy Makes Sense

Two of the most common scenarios when people opt to purchase ROP life insurance are when they’re having a baby or when they’re around age 30 (which obviously aren’t mutually exclusive). Here’s how it works under each example*:
Family with baby purchasing life insuranceHaving a Baby

A couple in their 20s is having a baby. They decide to make sure their young one will be financially protected should the worst happen to one of them. A 20 year term life policy makes sense. Instead of a 20 year term life policy with $250,000 in coverage they decide to buy the same coverage as a ROP life insurance policy. The downside? Instead of $14 a month in premium they end up paying $52 a month.

But the couple figures: (1) if the insured (let’s say the husband in this case) passes away during those 20 years, they’ll receive $250,000 and their child will be taken care of, or (2) if the husband survives the next 20 years, right about the time their baby is in college, they’ll get paid a lump sum of around $12,500 (everything they paid for the policy). Not bad.

Around 30 Years OldBought a house and purchasing life insurance

A woman celebrates her 30th birthday by buying a house. She doesn’t want her spouse to be stuck unable to pay the mortgage should she pass away so she decides to buy a life insurance policy for 30 years with $500,000 in coverage. The premium for a term life policy is $33 a month, but for $60 a month she can get a ROP life insurance policy. She can afford the higher premium so she opts for the ROP policy.

When the insurance policy expires she’ll be 60 years old. If she survives and her spouse doesn’t end up collecting $500,000, the ROP policy will pay her back all of her premium. So just as she’s approaching retirement, she can add about another $22,000 lump sum to her retirement funds.

To summarize, if you aren’t interested in life insurance, we don’t recommend ROP life insurance as some sort of investment tool. In that scenario we’d advise you to check out an annuity, real estate, the stock market – something in line with your personal risk aversion. But if you’re interested in term life insurance and can afford a higher premium, a ROP life policy is a great way to essentially protect your loved ones financially for free.

For more information, give us a call or shoot us an email. We’re also happy to provide free quotes for both term life and ROP policies.

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*These are purely examples and not offers of life insurance. The numbers used are hypothetical, are not exact, and are used for explanatory purposes only. For a personalized quote click here.

The Standard, MetLife, Principal Financial Group, Genworth, & Lincoln Financial Group