- Life Insurance

Return of Premium Life Insurance

If the lower premiums of term life insurance appeal to you, but you are confident that you are likely to outlive your policy’s term or you feel uncomfortable paying for something you may never use, then a return of premium term life insurance policy may be the right life insurance choice for you.

Traditional term life insurance pays a death benefit to your beneficiaries only if you die within the period of time, or term, covered by the policy. If you are still alive at the end of the term, and most term insurance policyholders are, then you receive nothing. With return of premium (ROP) term life insurance if you outlive your policy’s term, you receive 100% of your premiums back, tax-free.

ROP term policies cost more than traditional term life, as the insurer invests the surcharge to pay for the premium return. The longer the term, the smaller is the surcharge over a regular term life premium. For shorter terms such as 15 years, the surcharge can be as much as six times the cost of regular term life, while for longer terms such as 30 years it may only be between 25% and 50% more, because the invested funds have longer to grow.

If you were to invest the difference between the premiums for a traditional term life policy and for an ROP policy yourself, the growth would be taxable. The premiums returned at the end of a return of premium policy’s term are tax-free because they are under the umbrella of an insurance policy and they were paid with after-tax income.

If you die within the term covered by your ROP policy your beneficiaries only receive the death benefit; your premiums are not returned to them. In this case, you will have “overpaid” for your term insurance.

Insurers offering ROP policies have different ways of handling the return of your premium if you cancel your policy before the end of the term. With some you may lose all of your premiums, with others you may receive a prorated refund after a minimum number of years.

Return of premium term life insurance can be an attractive alternative to a traditional term life policy if you are confident that you will outlive your policy’s term.