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Ashley Maready
Policyholders with standard term life insurance lose the coverage at the end of term, and they don't get their monthly payments back. Return of premium (ROP) life insurance gives back those monthly payments -- the premiums -- at the end of the covered period.
You should consider adding a return of premium rider to your life insurance policy if you want a full refund should your death benefit never pay out.
The rider has some not-so-obvious pros and cons. More on those below. Read on so you can confidently decide whether to add the return of premium rider to your life insurance policy.
What is return of premium life (ROP) insurance?
Return of premium term life insurance is an add-on to a standard term life insurance policy.
Term life insurance is the most popular type of life insurance. Many people prefer term life over whole life policies because they're cheaper. Term life policies pay beneficiaries death benefits should the policyholder die, but policies last for limited terms, typically 15, 20, or 30 years.
If policyholders are alive when coverage ends, no benefit is paid, and policyholders never get money back. A return of premium rider changes that. It is essentially a money-back guarantee.
READ MORE: Term vs. Whole Life Insurance: Pros and Cons
How does ROP insurance work?
Return of premium insurance works this way:
- A policyholder purchases term life insurance.
- The policyholder adds a return of premium rider. This increases the cost of premiums by 30% or more in many cases.
If the policyholder passes away during the coverage term, the death benefit pays out. If the policyholder is alive when coverage ends, 100% of the premiums are refunded.
In most cases, policyholders must keep premiums paid and policies current until end of term for return of premium riders to work as intended. Should you fail to pay your monthly premiums, you may not get refunded.
TIP
Standalone ROP policies
Standalone ROP policies lump in the rider. These tend to be more expensive than standard life insurance policies. Many of the best life insurers offer return of premiums in zero policies.
How much does return of premium insurance cost?
ROP riders typically bump the cost of standard term life insurance by 30% or more.
Return of premium life insurance pros
ROP life insurance has significant advantages:
- Guaranteed benefits: The insurer either pays beneficiaries death benefits or refunds you 100% of premiums.
- Savings: The returned premiums serve as a type of long-term savings.
- Tax benefits: Refunded premiums are tax free.
READ MORE: What Is Whole Life Insurance?
Return of premium life insurance cons
There are also some significant disadvantages:
- Price: Return of premium life insurance is pricier than standard term life policies.
- Limited choice: Not all of the best term life insurance companies offer a return of premium rider, so consumers may have fewer options.
- Opportunity cost: Money spent on a return of premium rider may be better invested elsewhere. Other investments can produce better rates of return.
READ MORE: Where to Park Your Cash
What companies offer return of premium life insurance?
Many life insurance companies offer return of premium life insurance, but some are better than others. Here are some of the top choices.
Best for high death benefits: AAA Life Insurance
AAA provides return of premium coverage that allows policyholders to get back 100% of premiums. Death benefits range from $50,000 to $5 million, ideal for those who want substantial coverage. Policyholders can choose between 15-, 20-, and 30-year coverage terms.
Best for in-person support: State Farm
State Farm offers return of premium life insurance for policies starting at $100,000 in coverage. Policies run for 20- or 30-year terms. State Farm has one of the largest agent networks of any insurer, and it's ideal for policyholders who want help buying a ROP policy in person.
Best for customizable coverage: Prudential
Prudential lets you customize life insurance coverage quite a bit. You can even convert term life policies to permanent ones. The company's PruLife Return of Premium Term is available with 15-, 20-, or 30-year policies.
READ MORE: How to Buy Life Insurance: Step-by-Step Guide
Should you buy return of premium insurance?
It depends on your desired death benefits and how comfortable you are paying more upfront for a money-back guarantee..
Struggle to save a little bit at a time? You could take out an ROP policy and think of it as long-term savings. If you're alive to collect, you'll get it all back at the end of your term. You can't withdraw it early -- there's nothing to withdraw -- so there's zero temptation to spend.
Generally speaking, you should not buy a return of premium insurance policy to build short-term savings or to earn returns on investment. Your deposits won't earn interest like they would in a high-yield savings account. But adding money to savings takes discipline.
Most people find a return of premium rider too expensive to justify. The extra paid in premiums could be better invested elsewhere. To secure your finances and earn passive income, consider building an emergency fund. That way, you'll earn interest on your savings.
READ MORE: What is an Emergency Fund, and Why Do You Need One?
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FAQs
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Return of premium life insurance is more expensive than traditional term life insurance. Policy premiums could double. Most people are better off investing that money elsewhere.
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You don't get back your money at the end of a standard term life insurance policy.
Return of premium life insurance provides a money-back guarantee. If the policyholder doesn't die during the coverage term, they get 100% of premiums back.
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Policyholders who cancel life insurance typically do not receive refunds. Some states entitle you to a "cooling off period" of between 10 and 30 days from purchase. Basically, if you have immediate regrets and quickly cancel, you'll get a refund.
Our Insurance Experts
Christy Bieber is a full-time personal finance and legal writer with more than a decade of experience. She has a JD from UCLA as well as a degree in English, Media and Communications with a Certificate in Business Management from the University of Rochester. In addition to writing for The Ascent and The Motley Fool, her work has also been featured regularly on MSN Money, CNBC, and USA Today. She also ghost writes textbooks, serves as a subject matter expert for online course design, and is a former college instructor.
Cole Tretheway is a full-time personal finance writer whose articles have been featured on The Ascent and The Motley Fool. He has a degree in English with a Certificate in Professional and Technical Communication from California Polytechnic University, SLO.
Fact Checked
Ashley Maready
Ashley Maready is a former history museum professional who made the leap to digital content writing and editing in 2021. She has a BA in History and Philosophy from Hood College and an MA in Applied History from Shippensburg University. Ashley loves creating content for the public and learning new things so she can teach others, whether it's information about salt mining, canal mules, or personal finance.
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