When you take out an insurance policy, you may find yourself sorting through a bunch of riders. For instance, you may have heard about accidental death riders, long-term care riders, and waiver of premium riders.
But we’re here to talk about one you may be less familiar with. So, what is a return of premium rider, and is it worth the cost?
Table of Contents
- What is a return of premium rider, and how does it work?
- Cost of return of premium rider
- Who needs a return of premium rider?
- When should I take out a return of premium rider policy?
- Does age affect eligibility?
- Are all policies eligible for premium riders?
- What type of insurance would be used for a return of premium rider?
- Does an ROP make sense for you?
What is a return of premium rider, and how does it work?
A return of premium rider, or ROP, is an optional insurance policy add-on that refunds most or all of your premiums if you outlive your policy. Effectively, these riders negate your policy’s cost, so you don’t have to worry about “losing” money if you don’t use your benefits.
ROPs are most common in term life insurance, where policies are known as return of premium life insurance. In these policies, if you die during the coverage period, your beneficiaries receive the death benefit. But if you outline the term, you “lose” your premiums – unless you have a return of premium rider life insurance policy.
Cost of return of premium rider
ROPs can substantially increase the cost of your policy.
For instance, State Farm’s 20-year, $250,000 term life insurance policy starts as low as $15.22 per month, or $175 annually. But the same policy with a return of premium rider starts at $49.59 per month or $570 annually. That’s over triple the cost!
State Farm isn’t unusual. In fact, ROPs typically increase a policy’s cost 2-3 times on average. That said, you’ll receive the full premium back if you outlive your policy. So, the question becomes: could you use the money more wisely?
Who needs a return of premium rider?
An ROP can be helpful if you plan to outlive your term but want a policy to protect your family in case of your unexpected death. You can think of ROPs as a kind of zero-interest savings account with added life insurance benefits.
But for many people, the return of premium rider life insurance policies isn’t worth the extra cost if you could grow your money elsewhere. Let’s use State Farm’s sample rates as an example.
Example 1. You decide to buy a 20-year, $250,000 life insurance policy with a return of premium rider. Over 20 years, you spend $11,400: $3,500 on the basic policy and $7,900 on the rider. At the end of your term, you receive $11,400 back.
Example 2. You decide to buy the basic life insurance policy and invest the remaining $7,900, or $395 annually, in a Roth IRA. You contribute $32.92 per month for 20 years at 7% interest. In that time, your $7,900 grows to $18,844.22.
At the end of the term, despite “losing” $3,500 in premiums, you still net $15,344. That comes out to almost $4,000 more than if you’d purchased the rider!
When should I take out a return of premium rider policy?
As you can see from the example above, taking out a return of premium rider life insurance policy may not make sense if you invest regularly.
But if you want extra peace of mind, an ROP may benefit your family. Additionally, some insurers offer ROPs that build “cash value” that you can borrow from or withdraw interest-free to cover sudden expenses.
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Does age affect eligibility?
Typically, age doesn’t affect your eligibility to add an ROP to an insurance policy. But your age can affect your eligibility for the policy itself, especially if you’re over 75.
Are all policies eligible for premium riders?
Return of premium rider policies are set by individual insurance companies, which means eligibility varies widely. Typically, these riders are most common in (but not limited to) life insurance policies.
What type of insurance would be used for a return of premium rider?
Let’s take a look at the different insurance policies that may offer ROPs.
Term life insurance
Term life insurance is the most common place to find a return of premium rider. In term life insurance, you buy coverage for a set term, usually 10-30 years. If you die during the term, beneficiaries receive the death benefit. But if you don’t, the rider returns all the money paid into your premiums.
Long-term care insurance
Long-term care insurance covers nursing homes, home health, and assisted living care for aging adults. Some of these policies also include return of premium riders. But typically, these provisions are written as a “nonforfeiture benefit,” which means that your estate or inheritors receive the benefit only if you die before the policy expires.
Disability insurance pays out monthly benefits if you’re ever unable to work due to disability. Some disability policies also let you add on ROPs that payout periodically after a set period of time. For instance, a 20-year policy may return 50% of your premiums after 10 years and another 50% of your premiums after 20 years.
But most disability policies only return 50-80% of your premiums (though some policies that payout at age 65 or 67 may return your entire premium). And if you become disabled during the benefit period, the amount you claim will be subtracted from the amount you’re owed from your rider.
Does an ROP make sense for you?
For some people, attaching a return of premium rider to your insurance policy just makes sense. But for many, the added cost outweighs the benefit. And if you’re set up with a RoarMoneySM account with auto-investing, this may be true for you, too!
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