Return of Premium Life Insurance: Finding the Right Policy

Policyholders with standard term life insurance lose the coverage at the end of term, and lose the premiums they've paid. Return of premium (ROP) life insurance gives back the premiums at the end of the covered period. Here's what to know about this option.

Is a return of premium rider worth it?

Return of premium term life insurance is an add-on to a standard term life insurance policy. A customer who purchases a standard term life insurance policy can sometimes buy a return of premium rider. This returns the premiums if the death benefit isn't paid out. However, a return of premium rider comes at a significant cost, adding 30% or more to term life premiums.

Here's what to know to decide if a return of premium rider is worth it.

What is return of premium life insurance?

Term life insurance is a popular type of life insurance. Many people who compare whole and term life insurance decide on a term life policy because it is usually cheaper. Term life policies pay beneficiaries if the policyholder dies, but they are in effect for a limited time. For example, a term life policy may be in effect for 15 years, 20 years, or 30 years.

If the policyholder is alive when the coverage term ends, no benefit is paid, and the policyholder is simply out the premiums. A return of premium rider changes that. It is essentially a money-back guarantee.

How does ROP insurance work?

Return of premium insurance works this way:

• A policyholder purchases term life insurance that is in effect for a time.
• The policyholder adds a return of premium rider. This increases the cost of the term life insurance 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 the coverage term ends, 100% of the premiums are refunded.

In most cases, policyholders must keep the premiums paid and the policy current until the end of the term for the return of premium rider to remain in effect and premiums to get refunded.

How much does return of premium insurance cost?

Buying life insurance that pays you back is more expensive. It's typical for return of premium life insurance to cost at least 30% more than a term life insurance policy without this money-back guarantee.

Return of premium life insurance pros

There are some significant advantages to ROP life insurance:

• Return of premium life insurance is less expensive than whole life insurance.
• The insurer is guaranteed they will receive returned premiums, or their beneficiary (or beneficiaries) will receive a death benefit.
• The returned premiums are tax free.
• The returned premiums serve as a type of savings.

Return of premium life insurance cons

There are also some significant disadvantages:

• Return of premium life insurance is much more expensive than a standard term life insurance policy.
• Not all of the best term life insurance companies offer a return of premium rider, so consumers may have fewer choices.
• Money spent on a return of premium rider may be better invested elsewhere, because other investments can produce a better rate of return.

What companies offer return of premium life insurance?

Many life insurance companies offer return of premium life insurance. Here are some of the best choices.

Best for high death benefits: AAA Life Insurance

AAA provides return of premium coverage that allows policyholders to get back 100% of premiums. Policies are available with death benefits between $100,000 and more than $5 million, which makes this insurer an ideal option 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, so policyholders who want help buying a ROP policy in person may appreciate working with this insurer.

Best for customizable coverage: Prudential

Prudential offers many options for customizing life insurance coverage, including converting term life policies to permanent ones. The company's PruLife Return of Premium Term is available with 15-, 20-, or 30-year policies.

Should you buy return of premium insurance?

Is it a good idea to buy term life with return of premium coverage? It depends. The key question to ask is how much life insurance do you need, and whether it's smart for you to pay more for a money-back guarantee. Most people find a return of premium rider too expensive to justify. The extra paid in premiums could be better invested elsewhere. However, those who aren't consistent in saving money but who will pay insurance premiums may prefer the forced savings.