Is Return of Premium Life Insurance Worth It?

Return of Premium term Life Insurance (ROP) is designed to do exactly what its name describes.  At the end of your policy term, whether it is 15, 20, 25 or 30 years, you get back all of the premium that you paid over the term of the policy. You might be thinking “that sounds like a great deal so there must be a catch”. We wouldn’t call it a catch exactly, but there are a couple of things that you must fully understand before you consider a ROP policy.  This should help you decide whether or not return of premium life insurance is worth it.

How Does Return of Premium Life Insurance Work? –  Return of premium is actually a very simple product to understand.  You pay your premiums for the entire length of coverage and if you outlive the policy, you get all of your premiums back.  That’s it.  Essentially, the life insurance company is taking the excess premium that you are paying into the policy and it is investing those funds.  The goal of the insurance company is to get a return on the excess premium paid in each year that is high enough to give you all of your money back at the end of your term without the insurance company losing any money. With that being said, the insurance company makes you pay very high premiums for ROP insurance so that it only requires small returns to refund all of your premiums.

How Much Does Return of Premium Life Insurance Cost? – The refund feature of return of premium life insurance comes at a substantial cost compared to traditional level term life insurance.  The example below shows the difference in the cost of each policy for the same applicant using an A rated insurer.

Applicant: 40 year old male, “preferred best” rating, 20 Year term, $500,000 coverage

As you can see, the ROP policy costs $1,461 more per year than the regular level term policy.  At the end of the term, you would get the full amount of premiums paid back on a ROP policy ($36,200), but you would end up having to outlay much more cash in the form of premiums over the term of the policy compared to the regular level term policy ($6,980).  If you choose an ROP policy with a longer duration such as 30 years, the discrepancy between ROP and regular level term premium amounts will be smaller and the return will be higher since you are tying your money up for a longer period.

The “Cost” of Free Insurance – Another important thing you must consider on a ROP policy is the “return” you are getting on the policy.  Technically, you are getting “free insurance” because all of your premiums are being returned to you.  If you choose to purchase level term insurance and you outlive your policy term, you get nothing back.  So when you take the “free insurance” aspect into account, the ROP policy example above would return 2% yearly that is tax-free. Now what if you were to take the $1,461 difference and invest it each year on your own in stocks or mutual funds? If you invested $1,461 each year in stocks and mutual funds and averaged a 6% return, you would end up with $56,968.  That is roughly $20,000 more than if you used ROP life insurance, but you must be disciplined enough to invest the difference in premiums every year.

What if I Cancel My Policy? One more thing you must consider is that ROP policies are meant to be held for the full term.  If you cancel the policy early on, you will most likely get none of your premiums back. The percentage of premiums that will be returned to you will increase until it hits 100% in the final year.  The example ROP policy above has a return of premium schedule that is shown in the table below.  As you can see, cancelling this policy even after 12 years will only get you back roughly half of what you paid in. During the duration of the policy, you will build up “cash value” that is equal to the “surrender value” or what you would receive if you cancelled the account at that point.  For instance, using the example ROP policy above, you would have cash value of $11,077 after 12 years ($1,810 X 12 years X 51%).  You could borrow from this value (with interest of course), cancel the policy and take the cash out or stop paying premiums altogether and get reduced paid-up life insurance for the remainder of the term.

Conclusion – So, are ROP policies really worth it? If you are looking at ROP insurance from an investment standpoint, you are probably better off buying regular level term and investing the difference in stocks or mutual funds.  You will most likely recoup all of the premiums you paid into the traditional term policy and more by the end of the term.  ROP policies cost substantially more than traditional term policies and carry hefty consequences if you cancel or lapse the policy early on. On the other hand, there are a lot of people who view ROP life insurance as a predictable, forced savings vehicle with guaranteed (guaranteed by the claims paying ability of the insurer) and conservative returns. Some prefer this “set it and forget it” approach because they don’t have to do any of their own investing.  Before you consider a ROP life insurance policy, make sure that you have an agent explain the benefits and drawbacks of using this type of policy.  We would be happy to answer any questions that you might have about ROP life insurance.

About Us

Archstone Insurance Services, LLC is an independent agency that shops over 40 of the top life insurance carriers to provide huge savings on life insurance coverage for our clients.  We are happy to answer any questions you might have about any of the insurance products we offer, your planning needs or your existing coverage.  Feel free to call us directly at (888) 687-9444 or email us at info@archstoneagency.com.