How Return-of-Premium Life Insurance Works

Return-of-premium life insurance will refund your premiums if you outlive the policy, but it comes at a high cost.

Ben MooreMay 7, 2021
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An insurance policy generally isn’t something you can return for your money back, unlike a regrettable jacket or the wrong size shoes.

But among the types of life insurance, one breaks out of that conventional wisdom: Return-of-premium life insurance promises to refund the money you paid if you don’t die during the policy term. It’s a compelling proposition for people who cringe at the thought of paying for insurance with the possibility of never getting a payout.

What is return-of-premium life insurance?

Return-of-premium, or ROP, life insurance is a type of policy that refunds all premium payments made if the policyholder is still alive at the end of the policy period. The returned money is tax-free and can be used for anything.

If the policyholder dies while the policy is still active, the death benefit will pay out to the life insurance beneficiaries just as a standard term life insurance policy would.

How does return-of-premium life insurance work?

You buy a return-of-premium term life insurance policy, perhaps for a 20- or 30-year term. If you die during that time, your beneficiaries receive the death benefit. If you outlive the policy, you get back exactly what you paid in, with no interest. The money back is not taxable, as it’s simply a return of payments you made.

With a regular term life insurance policy, if you are still living when the policy expires, you get nothing back.

But everything has a price, right? You’ll pay a lot more for the money-back feature, as adding return of premium to a policy could triple the cost. According to data from Quotacy, a healthy 40-year-old male buying a $100,000 return-of-premium policy for a 20-year term could pay $499 a year, compared with $145 annually for the same policy without return of premium.

Return-of-premium life insurance pros and cons

While getting back the premium payments you made may seem appealing, there are drawbacks as well. Check out the pros and cons of a return-of-premium policy below.

Pros

Cons

If you outlive your policy term, you get your money back, unlike with regular term life insurance.

It’s much more expensive than regular term life insurance.

The returned money isn’t taxed since it’s not income, but simply a return of the payments you made.

You don’t earn interest on the money returned to you.

You generally have to hold the policy for the entire term and make all payments to get your money back.

Other things to keep in mind about return-of-premium life insurance:

  • The feature often is added as a life insurance rider.

  • If you cancel your policy before the end of the term — or simply stop paying — you might not get any money back, depending on the policy.

  • There may be a minimum amount of coverage you must buy, such as $100,000.

  • You may be able to convert a return-of-premium policy to a permanent one without a life insurance medical exam.

Return-of-premium features vary by insurer

Some insurers put twists on return-of-premium life insurance, so be sure you understand all the details of the policy. For example, some return-of-premium policies build “cash value” over time. You can take loans or withdrawals against the cash value. However, if you don’t repay the loan, your death benefit (if you die) or money back (if you don’t die) will be reduced by the amount taken out.

It’s also possible that you’ll receive less money back than you expected. Insurance companies could subtract fees paid for any additional riders you have, such as an accelerated death benefit.

Which companies offer return-of-premium life insurance?

Some of the biggest life insurance companies sell return-of-premium life insurance, and some smaller companies offer it as well. Here are a few examples.

Company

NerdWallet rating

Return-of-premium details

4.5

NerdWallet rating 

Offers ROP insurance policies for 20- or 30-year terms at level premium payments.

4.0

NerdWallet rating 

Offers 15-, 20- or 30-year return-of-premium term life insurance policies with level premiums.

4.5

NerdWallet rating 

Offers return-of-premium as a rider for 20- or 30-year term life policies.

3.5

NerdWallet rating 

Offers return-of-premium as a rider for 15-, 20- or 30-year term life policies.

Illinois Mutual

3.5

NerdWallet rating 

Offers return-of-premium 20- or 30-year term life policies.

Is return-of-premium life insurance worth it?

A standard term life policy may be all you need. The money you don’t spend on the return-of-premium benefit can be used for something else or put into an interest-bearing savings account. If you don’t spend the money and let it grow, you will end up with more money than if you had simply gotten your premiums back due to the interest you earn.

If you want a guarantee that you’ll get back the money you paid in premiums, then be sure to make all your payments on time and don’t cancel your policy. Otherwise, the return-of-premium benefit may not pay out at the end of your policy.

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