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What is return of premium life insurance?

Do you prefer to learn by watching? We answer this question in a video below. Click here to jump ahead.

Traditional term life insurance is structured to provide affordable financial protection during your loved ones’ most vulnerable years. If you die during these years, the term policy is there to provide a lump sum death benefit to your survivors. If you outlive this policy, you are still around to provide for your loved ones, but you do not receive any money in return.

There is a term life insurance product, however, that you can purchase in which you would get money in return if you outlive the policy. This product is called Return of Premium Life Insurance and it’s exactly what it sounds like. If you outlive the policy, you are refunded all the premiums you paid tax-free.

How does return of premium term life insurance work?

As with a regular term life insurance policy, the premiums you pay are guaranteed to stay level for the entire term of your policy. However, the premiums for a return of premium (ROP) term policy compared to a regular term policy are much higher.

» Learn more: How Much Does Life Insurance Cost?

Consider the comparison quotes table below.

Estimated Monthly Cost of a 20-Year $500,000 Policy for a Healthy Male
AgeTerm PolicyROP Term Policy
30$33.25$100.99
35$34.13$107.76
40$41.56$143.61
45$52.50$192.77
50$83.56$291.98
55$135.63$443.27
60$250.25$850.36

 

Example:

John Smith, a healthy 40-year-old husband and father, purchases a 20-year $500,000 return of premium term policy. This policy costs $143.61 each month.If John dies prematurely within the 20-year period, the insurance company pays his beneficiary a benefit of $500,000.

If John is alive when his policy expires at the end of 20 years, the insurance company returns John’s paid premiums, a total of $34,466.40.

Return of Premium and Cash Value

Similar to a permanent life insurance product, some return of premium products generate a cash value. Typically, cash values don’t start to accumulate for a few years and it builds very slowly; however, every year the growth percentage increases.

Loans can be taken against this existing cash value, but there is interest that gets tacked on. As cash values accumulate in the policy, you also have the option to use these funds to pay the premiums; however, this is still considered a loan and the same factors exist.

It’s important to note that the cash value does not get added to the death benefit total. The table below shows an example of how the premium, cash value, and death benefit work with an ROP policy.

20-Year $300,000 Return of Premium Policy for a Healthy 35-Year-Old Male
TermAnnual PremiumCash Value
Year 1$805$0
Year 2$805$0
Year 3$805$0
Year 4$805$0
Year 5$805$600
Year 6$805$600
Year 7$805$1,315
Year 8$805$2,152
Year 9$805$3,030
Year 10$805$3,949
Year 11$805$4,914
Year 12$805$5,925
Year 13$805$6,986
Year 14$805$8,099
Year 15$805$9,268
Year 16$805$10,496
Year 17$805$11,787
Year 18$805$13,147
Year 19$805$14,580
Year 20$805$16,094

If you die within the term and there is a loan against the policy, your beneficiaries will receive the death benefit minus the loan plus interest. If you outlive the policy, you’ll get refunded your paid premiums minus any loans plus interest.

If, for some reason, you decide to surrender the policy, you would not receive your premiums back, but you would receive the cash value, if any has accumulated, minus any surrender fees and any outstanding loans plus interest.

A return of premium policy can be a great option if you’re financially stable and don’t mind paying more for a guaranteed refund.

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When would a return of premium policy be a good option?

Regular term life insurance is the best option for most families because of how affordable it is; however, if you can afford to regularly pay the increased ROP premiums without fail, then it’s something to be considered.

» Calculate: Life insurance needs calculator

Below are some situations in which a return of premium term product may be a good decision.

Divorce Requirements

ROP can be a good fit for divorced parents. When minor children are involved, the non-custodial parent is usually required to maintain life insurance for the benefit of the custodial parent and/or children. ROP may offer parents the opportunity to fulfill this life insurance support obligation and perhaps even get a full refund of paid premiums.

Buy-Sell Agreements

ROP can be a good fit for business partnerships. If the partners outlive the policy, the premium refund can be used to help fund a business buyout. If one of the partners dies, the death benefit can provide the necessary buyout funds.

College Funding

If you are planning to pay for your child’s college tuition, an ROP policy can help. If you die during the term, the death benefit ensures your child can still afford college. If you outlive the policy, the refunded premiums can go toward paying off student loans.

Paying Off the Mortgage

An ROP policy can protect your loved ones and ensure they wouldn’t need to sell the home if you died prematurely.

For example, if you have a 30-year mortgage loan, you can choose to purchase a 30-year return of premium term policy. If you die during the term, the death benefit can help pay off the mortgage. If you outlive the policy, the refunded premiums can be used to remodel the house.

Another option would be to buy a return of premium term policy with a term shorter than the mortgage loan term. For example, if you have a 30-year mortgage loan, you can choose to purchase a 20-year return of premium term policy. If you die during the term, the death benefit can go toward the mortgage loan. If you outlive the policy, you can use the refunded premiums to pay off the mortgage early.

Example:

Dick and Jane Smith just purchased their first home. Their mortgage loan is for $300,000 with a 30-year term. They want to both own life insurance just in case one of them should unexpectedly pass away.Dick is 35 years old, healthy and a non-smoker. He purchases a 20-year $300,000 ROP policy for $67.03 per month.

Jane is also 35 years old, healthy, and a non-smoker. She purchases a 20-year ROP policy for $60.82 per month. Note: Women pay less for life insurance than men (except for unisex laws in Montana) because statistically women live longer than men.

Should either of them pass away during the term, the surviving spouse can use the life insurance death benefit of $300,000 to pay off the mortgage. Plus, at the end of the surviving spouse’s 20-year term, he or she would receive all the premiums back that they paid.

If they both outlive their policies, not only can they celebrate being alive, they each receive a refund of all premiums paid. Dick receives $16,087.20 and Jane receives $14,596.80. They can then take this combined amount of $30,684 and put it toward their mortgage loan.

A return of premium policy can be a great option if you’re financially stable and don’t mind paying more for a guaranteed refund. However, ROP isn’t the best choice for everyone and purchasing an inexpensive traditional term policy and investing that extra amount elsewhere might be the better option. Talk with a Quotacy agent if you’re unsure what type of policy is best for your situation.

» Compare: Term life insurance quotes

 

Watch the Return of Premium Life Insurance Video

Video Transcript

Welcome to Quotacy’s Q&A Friday where we answer your life insurance questions. Quotacy is an online life insurance broker where you can get life insurance on your terms.

I’m Jeanna and I’m Natasha.

Today’s question is:
 
What is return of premium life insurance?

 

If you have a term life insurance policy with the return of premium feature this means that if you were to outlive your policy you get a portion of your paid premiums returned to you. If you have a universal life insurance policy with the return of premium feature this means that if you were to cancel the policy you get a portion of the premiums back. Price-wise a policy with the return a premium feature is going to be more expensive than a similar policy without.

For example, Prudential is one of the many life insurance companies we work with. It’s also one of the few that offer return of premium term life insurance. If I, a 32-year-old female, ran a quote for a $500,000 20-year term life insurance policy from Prudential it would be about $27 per month. If I instead wanted that same policy but with the return of premium option I would be paying about $89 per month.

Traditional Term Life Insurance vs Return of Premium Term Life Insurance
20-Year $500,000 Policy for 32-Year-Old Female (healthy, non-smoker)
Monthly Premium for Traditional Term$27
Monthly Premium with Return of Premium Option$89

Regular term life insurance is the best option for most families because of how affordable it is. However, if you can afford to regularly pay the higher cost of a return of premium policy without fail then it’s something to be considered. There are certain situations in which a return of premium term policy may make more sense than a traditional term policy.

» Compare: Term life insurance quotes

A return of premium policy can be a good choice to meet divorce requirements. When minor children are involved in a divorce, the non-custodial parent is typically required to buy life insurance for the benefit of the custodial parent and the children. A return of premium term policy offers the parent the opportunity to fulfill the support obligation and get refunded if they outlive it.

A return of premium term policy can also help parents who want to contribute to the child’s college tuition. If a parent dies during the term, the death benefit can insure their child can still afford college. If the parent outlives the policy, the refund of premiums can go towards paying the student loans.

A return of premium term policy can also be a beneficial strategy in protecting a mortgage loan. For example, let’s say you have a 30-year mortgage loan you could buy a 20-year return a premium term life insurance policy and if you die unexpectedly within those 20 years your family receives a death benefit and can continue paying the loan. And if you outlive the 20-year return of premium term policy you can then put that refund of premium towards your mortgage loan and get it paid off much sooner.

This strategy is only wise if you can comfortably afford the higher premiums that come with a return of premium policy. It does your family no good if you can’t afford it long term and end up having to cancel the policy.

A return of premium term life insurance policy only returns the premiums if you outlive the policy not if you decide to cancel it.

» Learn more: What Happens If I Outlive My Term Policy?

This is opposite, however, with a universal life insurance policy that has a return of premium feature. A universal life insurance policy is a type of permanent life insurance so there is no outliving the policy. This policy lasts until you die as long as the policy’s kept active.

If you purchase a universal policy with a return a premium feature you can cancel the policy and receive the premiums back. Make sure you read the fine print, however. Some universal life insurance policies require the policy to be active for a certain period of time before you cancel it in order to be eligible to get the refund. And sometimes it’s only a certain percentage of the premium if the policy is canceled early on.

For example, AIG is one company Quotacy works with that offers what is called a guaranteed universal life insurance policy with a return a premium feature. If you cancel the policy at the end of the year 20, you can receive a refund up to 50% of the total premiums paid. If you cancel at the end of year 25, you can receive up to 100% of the premiums paid.

» Calculate: Life insurance needs calculator

Return of premium life insurance sounds pretty good on paper but be sure to really consider the cost when deciding what type of life insurance to buy. Return of premium life insurance isn’t the best choice for everyone. And purchasing an inexpensive traditional term policy and investing the amount you save elsewhere may be a better option. Contact us here at Quotacy.com and an agent can help you figure out what type of policy is best for your particular situation.

If you have any questions about life insurance, make sure to leave us a comment. And if you’re ready to get quotes, check out Quotacy.com. We’re here to help you find the best deal on the life insurance you want.

About the writer

Headshot of Natasha Cornelius, a life insurance writer, for Quotacy, Inc.

Natasha Cornelius

Marketing Content Manager

Natasha is a writer and content editor at Quotacy. She is also co-host of Quotacy’s YouTube series. She can't get enough of life insurance and outside of work is also working toward her Chartered Life Underwriter designation. Connect with her on LinkedIn.