As far as Term Life Insurance goes, this product is fairly uncomplicated. You purchase the insurance policy, and if you die within the policy period, it’s in force and your designated beneficiary receives the death benefit. But what takes place when you do not die during the term of the policy? Let’s discuss how the return of premium rider can benefit you.
This is certainly a drawback regarding life insurance for most applicants. On the one hand, congratulations – you’re still living. On the other, you have just invested for a few decades and several thousand dollars on apparently nothing at all.
Of course, in reality, you didn’t actually receive “nothing at all.” You received peace of mind and monetary protection for your family in a very unappealing circumstance. Nevertheless, human psychology is an amusing thing, and for certain individuals, it can look and feel like a complete waste of their hard-earned money.
This is when the return of premium life insurance rider will come in. Can you create a term insurance policy that gives you affordable coverage and will make you feel great about the “value” you appear to be getting? Here, we’ll discuss this option and find out when it comes in handy.
What is the Return of Premium Rider?
If you believe the return of premium (ROP) rider on an insurance policy appears to be a life insurance policy that returns your premium when you outlive the policy, then you understand the fundamentals.
To be clear, the return of premium life insurance policy would mean that once the term of your policy is exhausted and you’re still living, you will be refunded the money you put in as premiums returned to you on a tax-free basis. The refunded premium is tax-free because you paid the premiums with after-tax money. If you paid in $30 per month for a 20-year term insurance policy, you would receive $7,200 back tax-free. This can either be issued as a return of premium insurance policy or as a rider on a traditional term policy.
You will normally be refunded 100% of the premium you paid in – including the cost that you paid for the return of premium rider – but normally there are fees and additional riders that are added to the policy above, and beyond the return of premium rider may or may not be contained in the refund. If you are interested in this type of insurance policy, make sure to check with your insurance agent on what specifically you will be getting back.
Irrespective of how you receive a return of premium refund, you’ll definitely end up paying more for it. If the ROP is built into the policy, the periodic premiums will be higher; if you add the return of premium rider, the cost of the rider will be added to your premium payments. Overall, you’ll be looking at around a 30% surcharge on your monthly premiums depending on your age when you purchase the policy. This is precisely why, even though a lump-sum refund seems like a guaranteed win, it’s important to understand if the return of premium is best for you.
Advantages of the Return of Premium Policy
The most apparent advantage of the return of premium rider is, well, the refund of all your premium. Life insurance is certainly important, but it can really feel awesome to get the money returned if you end up not having a need for the policy.
The simple fact that you can, in essence, get a refund is also awesome for individuals who need protection but have a low tolerance for risk. Most of us often think of life insurance protection as a “what if” need – “What if I die and I am no longer around to support my family?” – but then again, some people might think of it as “What if I invest $20,000 into a life insurance policy that I will not ever use, and now I don’t have those funds for my retirement nest egg?” With a return of premium life insurance policy, you will not have to make that choice any longer.
You may also consider a return of premium insurance policy as a forced savings strategy. If you are not very good with money management and would like to make certain you have some money saved up down the road, a return of premium term life insurance policy offers you insurance protection for up to 30 years. Then, when the policy expires you are paid back with the premiums you put in your policy. You can then use this tax-free windfall for anything you want, like investing in your retirement or paying off the mortgage on your home.
Are there Disadvantages to Return of Premium?
As with any insurance product, there are certainly cases where the return of premium is less attractive and may not work in your favor.
- If the additional cost of the rider forces you to buy less coverage than you need.
- If the rider is too expensive because of your age group.
- The return of premium rider does not provide for the insurer to return any interest with your premium refund which means you would be financially better off if you had invested that additional premium in typical investment product.
When you are contemplating a return of premium insurance policy, you should consider your money management skills as well. If you are the type of person that faithfully saves and invests, then you’re likely not a great candidate for this type of insurance product.
However, if you are like the majority of America and are trying just to make ends meet, then the forced savings that result from having return of premium life insurance would be perfect for you and your family..