What is Return of Premium Life Insurance?

Most of us know we need life insurance to protect our family’s financial future. Carrying a life insurance policy can help ensure that your loved ones are cared for in the event of your death, helping maintain their standard of living, pay for healthcare and educational expenses and provide comfort in times of need. 

But there are many kinds of life insurance, with different costs and benefits, that you can choose from. There are permanent life insurance policies, which last in perpetuity. Others, called traditional term life insurance, provide a benefit should you pass away during the duration of your term. If you only want coverage for a certain number of years, term life insurance may be the way to go.

With some term life insurance policies, when the standard term expires, you stop making payments but will not receive any further benefits.

Then there’s return of premium life insurance (ROP), a kind of term life insurance that pays you back if you outlive the period covered by the policy. Here’s a breakdown of what it is and how it works. 

What Is Return of Premium Life Insurance?

Return of premium life insurance is a version of term life insurance that offers you coverage for a set number of years — but with a bonus. With return of premium life insurance, you gain coverage for a term of 30 years with fixed premium payments (meaning you pay the same amount every month). The minimum face value amount typically offered is $100,000.

If you outlive your term, known as the level premium payment period, the base policy premiums you paid will be returned to you at the end of the term. Generally, the amount of the lump-sum payment is the total base premiums paid over the life of the policy (rate ups, modal expense factors and rider charges are not returned). 

Your needs might also change prior to the end of the level term. With ROP, you will receive a portion of the base premium back if you cancel the policy early.

What Are the Pros and Cons of Return of Premium Life Insurance?

Perhaps you love the idea of having life insurance but don’t love the idea of spending money on a term policy you may never use. If that’s the case, return of premium may be the policy for you. Here are some reasons to consider term life insurance with return of premium — or to decide against it.

Pro: Lump-Sum Payment

The lump sum received when premiums are returned is tax-free and can be used however you choose. In contrast, with a traditional term life insurance policy, if you outlive the term, you won’t get your money back.

Pro: Traditional Benefits

If you pass away during the coverage period, your beneficiaries will receive the death benefit. That means no premium will be returned, but the insurance has done what it’s intended to do: provide funds to beneficiaries after you’re gone. In this way, ROP acts like traditional life insurance.

Pro: Option to Convert

Sometimes your needs change. Here’s some good news: Once you purchase a return of premium policy, if you decide down the road you want to convert to a permanent life insurance policy like whole life coverage, you may be able to do so. Your financial advisor should be able to help.

Con: Higher Cost

Because an ROP policy offers more flexibility than a traditional term policy — and returns your payments to you if you outlive the term — it costs more than a traditional policy. That’s important to keep in mind when you’re making decisions about what kind of policy is best for you, your family and your life situation. 

Is Return of Premium Life Insurance Worth It?

If you’re considering getting an ROP policy, you’re probably asking: Is it worth the extra premium payments? The short answer: possibly. The benefit of this type of life insurance is that it’s life insurance that pays you back, because if you outlive your coverage, the base premium you paid comes right back to you. ROP life insurance also acts almost like a forced savings account. It’s money that’s already yours, but it’s being stashed away for a future when you’re nearer to retirement.

Find the Right Fit

Life insurance comes in many shapes and sizes, and picking one is all about providing you and your family with the right financial protection. Reach out to your local Farm Bureau agent to discuss your individual needs and goals and review your options.