MoneyLife

What Is Return of Premium Life Insurance?

By Cameron Walch
return of premium life insurance

Have you ever wanted a life insurance policy that comes with a guaranteed payout? This may sound too good to be true, but it’s not! With a return of premium life insurance policy, you will get your money back, no matter what happens. There are some specifics and limitations you should keep in mind.

Read on to find out more about what a return of premium life insurance is and if it’s the right policy plan for you !

What is the return of premium life insurance and how does it work?

Return-of-premium (ROP) life insurance is a policy that will refund all insurance premium payments that have been paid if the policyholder has not passed away at the point when the policy period ends. The best part is that this money is returned tax-free, and there are no limitations regarding what the money can be used for. 

This money can be returned tax-free because it is your own money that you put into your insurance policy. These policies are normally set for a 20 to 30-year time frame, which means the policyholder has a high chance of still being alive once that period is over. However, if the policyholder dies, the beneficiaries will receive the death benefit. 

But what’s the catch? Is there one? Well, yes! You have to pay higher premiums for this convenience. With a normal term life policy, the money you put into your policy will go to waste if you outlive your policy, but in order to secure an ROP, you’ll have to pay as much as three times the premiums of other insurance policies.  

Factors you should consider

Before entering into an agreement of twenty to thirty years, it is wise to do some research and make sure that this kind of policy makes sense for you as well as your current life situation. 

Variety of features 

Just like any other type of policy or agreement that is made with anyone, terms may differ. There may be different lengths or different premiums depending on the insurer. It is always wise to shop around and make sure that you can find the best policy for you. 

Type of coverage

There are different types of coverage when it comes to life insurance policies. The main question is whether you should go with term life vs whole life policies. Wondering which one is better? The answer is that it depends. 

The main difference between term life vs whole life policies is that term life policies give you a certain amount of time to pay into the policy. Rarely will the monthly premium amount change. There is also a high chance that you will outlive your term life policy. 

On the other hand, whole life policies will exist for the rest of your life. Outliving a lifelong policy is impossible, making the monthly premiums much more expensive. 

Amount of coverage

In order to keep premiums as low as possible, you’ll want to get more coverage than you actually need. By increasing the amount of coverage you secure, you will increase the cost of your premium as a result. Even if you qualify for a one million dollar policy, is that something that you really need to have? That’s an important question to ponder! 

Term length 

Determining the length of your term can always be a challenge. There are many different factors that must be considered, and it’s always smart to ask yourself why you are getting this policy in the first place.

Is it to help protect your mortgage? Is it to protect your earnings until you retire? Finding the why behind your decision to take out an insurance policy is very important.

Many term policies, like ROPs, can last anywhere from ten to thirty years. Choose which one suits your reason for a policy the best as well as your monthly premium budget.

Example of return of premium life insurance

Rebecca is a smoker at the age of thirty-four and purchases a thirty-year term policy in the amount of $300,000. She will have an annual premium of $554, and if she wants to turn it into an ROP policy, then that value will be increased to $915. 

The total cost of the term policy is $16,620 whereas the ROP policy amounts to $27,450. Is an additional $10,830 worth the guaranteed return of her premium?

Well, imagine if she took that difference of $361 and invested it into the stock market instead and earned 8% annually, then she would make more money in the stock market than she would from the ROP. 

At the end of the day, it depends on Rebecca’s risk tolerance. Is she willing to take on the risks associated with investing in the stock market, or would she rather have a guarantee? That’s a decision for Rebecca to make, just like it’ll be a personal decision for you as well. 

Advantages of return of premium life insurance

Returned premiums 

Guaranteed money is always a great convenience. It may not be guaranteed for you, but at the very least, your beneficiaries will see the money that is paid into the policy. 

Spending limitations

Once the policyholder receives the return of the money they put into their premiums, then they will have a lump sum of money that can be put towards anything they want. It is not limited to higher education, healthcare costs, or retirement. It can be used immediately and for anything. 

Cancellation policies 

Depending on the terms and agreements of return of premium life insurance, it might be possible for you to submit a cancellation request for your policy. Upon cancellation, you will get your money back in full. 

Disadvantages of return of premium life insurance

Costs

As stated above, these policies are often much more expensive than other insurance options. They cost more because of the guaranteed payout that happens at the end of the term, whether that money is returned to you or given to your beneficiaries. 

No interest

Return of premium life insurance policies does not accrue interest throughout the duration of the policy. If you were to purchase a term-life policy and invest the difference, you might make even more money from the interest earned than you would have received at the end of your return of premium life insurance policy.

Mitigating risks 

It all comes down to risk. What are you willing to do to mitigate your risk? And what are the benefits of attempting to mitigate that risk? Make the right decision for you and consider setting up a safety net account with MoneyLion to alleviate unnecessary financial stressors in your life.

With MoneyLion Safety Net, you’ll gain access to our suite of financial tools at a birds-eye view. In the palm of your hands, you can instantly access all your available funds when life’s unexpected moments happen. From early payday to a low-cost Credit Builder Loan–we have you covered!

FAQs

How do you calculate the return premium?

Calculate the number of days left in the policy and divide that by the total number of days of the policy. Multiply this number by the annual policy premium to determine your return premium.

Will life insurance premiums come back?

Life insurance premiums will be returned to you if you have a return of premium policy with your term policy.

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