What is return of premium life insurance?
Return of premium life insurance policies refund your paid premiums if you outlive your term. Learn more about how ROP life works and if it's right for you.
Information courtesy of USAA Life Insurance Company and USAA Life Insurance Company of New York
It's somewhat common for people to outlive or cancel their term life insurance policy before it's time to use the benefit. That's one reason this type of life insurance coverage is more affordable.
Return of premium, or ROP, term life insurance policies give you a refund on premiums you paid for the policy if you outlive the term — and they pay a death benefit to your beneficiaries if you die during the life of your policy.
Avoiding the sunk cost of outliving a term life insurance policy might sound like a good thing. But as with most insurance, there are pros and cons with return of premium life policies to consider.
Is ROP the right type of life insurance for you? Here are a few things to keep in mind.
How does return of premium life insurance work?
Some life insurance companies offer standalone ROP policies, while others let you add an ROP rider to an existing term policy. Generally, ROP insurance terms are 20 to 30 years.
ROP policies or riders require policyholders to make monthly premium payments for the life of their contract, similar to a traditional term life insurance policy.
If the term ends and the policyholder is still living, the insurance company will pay back some or all the money paid in premiums, depending on the policy. This money, known as an ROP benefit, likely won't be taxable unless there is a gain. The refund also might not include fees or other policy-related expenses.
If policyholders miss a premium payment, they could be disqualified from receiving their ROP benefit. If you have any questions about tax liabilities or policy coverage, check with a tax advisor.
One other caveat: Unlike other insurance policies that base premium costs on the policyholder's health, age and desired death benefit amount, some companies offering ROP insurance take the applicant's credit score into account when determining their premium prices. If you are concerned about your credit and want to get a better rate, it might be helpful to spend some time improving your score before applying for an ROP policy.
What are the pros and cons?
Is an ROP insurance policy the right choice for you? It depends on your situation.
Pros of an ROP insurance policy
An ROP policy can help give you a sense of security if you're worried about outliving your policy. When your term is up, the insurance company returns some of what you paid, usually without an income tax.
Many policies have a fixed premium during the term. Some also have cash value that you can borrow against as an added benefit.
Cons of an ROP insurance policy
Not many companies offer ROP policies. When they're available, premiums are often more expensive than a standard term option. What you pay doesn't earn any interest either.
When you choose an ROP, you're committed to the full length of the policy term. If you cancel the policy or miss a payment, you could lose all the money you already paid.
Why consider return of premium life insurance?
If you're worried about the risk of purchasing a policy you might not need — say, by outliving your term policy — an ROP policy could help ease your fears while still allowing you to provide for your loved ones after you're gone. Think of the ROP policy as added security for your life insurance.
And the bonus? Depending on your policy's term length, the payout of your ROP benefit could lineup with your retirement age, offering a cushion around the time you stop earning an income. In this sense, ROP can act like a forced savings account, helping you plan for the future.
Return of premium life insurance alternatives
If you decide the high cost of an ROP policy isn't worth it for you, there are other options to explore. You could always buy normal term coverage and invest the difference you save by not going with the ROP policy. By investing wisely, you could potentially earn enough to make up for the loss of your premiums if you outlive the policy.
Another option for lifetime coverage is permanent life insurance. These policies include a cash value component that can accumulate and earn interest, and you might be able to withdraw or borrow from that sum.