Purchasing a life insurance policy can get complicated. There are several different policies to choose from that can make it hard to decide.
One of the most popular life insurance policies is a term policy.
Term Policies cover you for a specified term, usually 10-30 years, compared to their counterpart whole life policies which cover you for the entirety of your life.
Term life insurance is a much more affordable option because it only covers you for a specific period of your life.
One of the biggest concerns for term life policyholders is that the death benefit is never actually needed as the policyholder outlives the term they were covered for.
What happens to all of the money I spent on life insurance premiums if I never I used the policy?
This a very reasonable question.
Permanent life insurance policies have a cash value benefit that can compensate the policyholder for payments that have been made so why not term life policies?
That is where Return of Premium Riders come in to play.
What is a Return of Premium Rider?
A Return of Premium Rider, also known as ROP rider, allows term life policyholders to recover all or a majority of their premiums paid over the life of the policy if they do not die during the allotted term.
Most people are fortunate enough to outlive their term life insurance policy, therefore, their money spent on premiums was for nothing.
A ROP rider was made to address this issue and provide compensation for these insurance policyholders.
How Much Does it Cost?
A Return of Premium Rider guarantees money back in your pocket if you do not need the life insurance policy but there is a catch.
A life insurance company will not incur greater risk without being compensated for that risk.
A Return of Premium Riders typically increases your annual premium payment by 20-40%.
Life insurance companies are at a higher risk of refunding you your money which will raise the cost of your monthly and annual payments.
Since this rider does cost more to attach to your policy you will want to know the advantages and disadvantages of the accessory.
Pros and Cons
1. Refunded All Of Your Payments
The obvious advantage is that you receive all of your monthly or annual payments you made completely refunded for the entire term of your policy. The refunded money may have a few fees attached based on your policy and insurance company so make sure you are aware of these before purchasing a policy.
2. What You Put In Is What You Get Out
Not only do you get reimbursed for the entirety of payments that you made during your policy but the money that is refunded is tax free. You get the exact amount back that you paid.
It made not be new income because it is already money you have paid but receiving ten thousand dollars can be a great financial pillow to sleep on.
3. Peace Of Mind
Peace of mind may be the best benefit because you may be paying 30% more in premiums but your family is covered with the death benefit if something terrible were to happen and you are guaranteed to get money back if you do not need the protection after all.
1. More Expensive Premiums
Even though you have the opportunity to earn the cash back, the premiums are more expensive than a typical term life policy.
The longer the length of the term the more expensive this cost can become. A 20-40% price markup on premiums can be tough to pay for each month for 20 – 30 years.
2. Inflation Is Not Accounted For
Twenties dollars today is worth a lot less than twenties dollars 20 years from now. The money you receive is great to have but you have actually lost money because the money is not inflated. Inflation typically raises 4% every year and you lose this each year your money sits in the account.
3. Invest The Difference
Depending on the length of your term life policy it may make more sense to purchase a normal term life policy and invest the additional funds you would have spent on the return of premium rider.
This outcome varies based on the return rate of said investments as well as the length of the policy that will be purchased. Speak to your life insurance agent to find out what works best for you.
Who Is The Return Of Premium Rider Best For?
These types of policies are perfect for consumers who are purchasing a policy for a short period of time (10-20 years).
A short term means a limited amount of marked up payments that need to be made.
With a term of 10,15, or 20 years it can make more sense financially to purchase the rider because investing the difference typically will not yield the same amount of returns. This is because money grows over time.
In a whole life policy, it makes more sense to choose a term policy and invest the difference because it is based off of your entire life.
A return of premium term policy is only for a limited amount of time. It is much harder to yield the same returns this policy would if you tried the stock market for only 10 years.
A return of premium policy is perfect for someone who is looking for peace of mind. If you want to be covered no matter what this type of term life policy can help. It covers you if something terrible were to happen and if nothing happens at all.
It is essentially a win-win situation for policyholders who want to be covered no matter what if they can afford the annual payments.
Best Life Insurance Company For Return Of Premium Policies
A non-smoking 30 year old male in good health can purchase a 20 year return of premium term life policy that covers $500,000 in death benefit for $101 a month.
This man will pay $24,240 over the course of 20 years but have $500,000 worth of coverage for his family if he dies or would be completely refunded the amount if he does not need it.
Prudential offers term life insurance for $33.25 a month without the return of premium attached. This payment is significantly less than the premium with the return of premium rider attached.
Over the course of the 20 year term the policyholder would pay only $7,980 for the same $500,000 death benefit.
Although this is a large difference in payment, the policyholder will lose the $8,000 at the end of the term if they do not need the death benefit.
If the policyholder does attach the ROP Rider he will have to pay 3 times the amount he normally would but he would get all $24,240 refunded to him at the end of the term.
Return of Premium Riders are a great solution for people who want maximum financial coverage. They can help cover a family financially whether something were to happen and if nothing happens at all.
They are much more expensive than a normal term life policy which is why we recommend getting a quote and talking to a life insurance agent to find what is best for you!