The return of premium life insurance policy has gained popularity in recent years thanks to its very high return rate. This type of life insurance offers some advantages for those who are diligent at keeping up with their premiums and have a steady flow of income that is resistant to change.
It is important to understand what the policy is all about. You will get to know the overall working principles and whether it is worth the overall investment for your particular needs.
Table of Content
- What is A Return of Premium Life Insurance?
- How Does It Work? [Important]
- Is Return of Premium Life Insurance Worth It?
- Return of Premium Life Insurance Pros and Cons:
- Return of Premium Term Life Insurance:
- Return of Premium vs. Term Life Insurance:
- Benefits & Catches:
- Where to Buy ROP Life Insurance?
- Getting Quotes:
What is A Return of Premium Life Insurance?
The return of premium life insurance is one of those policies that have gained considerable attention in recent years. This is because, for those who are very diligent about paying their premiums, this can be a very beneficial policy for those who have a steady stream of income.
Essentially, a policy of such is one that returns the payments made by the person over a set period, minus any fees or charges from the life insurance company. For example, if you take out a 10-year policy with “Return of Premium” clause, if you outlive the ten year period you will receive back most of the money paid into the policy.
In many ways, an ROP policy is very similar in structure to term life insurance. However, the big difference is that at the end of the term you get your premiums back with interest and minus any fees or charges along the way.
These policies have been around since the early 1990s but have been gaining favor over the years thanks to their high rate of return for policies that go out of date. However, are they the best type of life insurance policies for you?
How Does It Work? [Important]
In most life insurance policies, the premiums you pay don’t return after the term of the policy expires. However, ROP means that the more you have invested, the greater the working principle that will be paid back if you should outlive the term of the policy.
However, this also increases the chances that you will either not outlive the policy or that you may fail to keep up the premium payments. These risks will need to be evaluated before choosing such a policy.
Is Return of Premium Life Insurance Worth It?
The real question is whether an ROP life insurance policy is right for your needs and your budget. There are many advantages to getting it for sure, but there are also few disadvantages as well which may make this unattractive to some.
Getting Premium Back w/Interest
This is the reason for getting this type of policy. A person can see the money they invested come back with interest over a set period. For many, a return of premium policy represents an enormous benefit that can be used to invest in retirement, child college fund or other need that can be fulfilled by this particular type of policy.
Higher Premium Cost
However, even a return of premium life insurance without medical exam is substantially more expensive regarding the premiums that are paid. For many, this represents too much of a monthly investment on the family budget. However, for those who can make the sacrifice this type of policy does offer healthy benefits.
Good Investment Strategy
ROP has become successful because it does serve a dual purpose. You are investing with a high-interest rate and providing protection in case something unexpected should happen. This is true in the relatively short term when for example a ten year policy may be the perfect choice for those with children reaching college age.
Sustain the Premiums
Life insurance companies are more rigid when it comes to their ROP policies, so maintaining your premiums is even more important. That is why this type of policy is suitable for people with substantial incomes and long job histories. Even if you take a long-term policy, say 30 years, for example, it will still take 15 to 20 before you can get even a partial return assuming you break the plan. State Farm offers level term for 20 or 30 years.
There are few things as disheartening as getting close to the end of a ten year plan. You only have it canceled due to lack of premium payments and get nothing for your investment.
Return of Premium Life Insurance Pros and Cons:
ROP pros and cons may vary depending on the length, premiums and benefits that the policy provides. However, there are certainly advantages and disadvantages present for those who want to pursue this type of policy.
Flexibility: It offers the same type of flexibility as term insurance in that you can choose the time period, benefit and premium rate that best suits your needs.
Return of Investment: Compared to a standard term life insurance policy, the rate of return for your investment is quite high indeed. In fact this may be the biggest advantage available of all.
Non-Taxable Sum: Once the lump sum is paid out, there are no taxes that are due. This is because you have already paid taxes on the money that was put into the premiums which means that withdrawing them at the end of the term will not require any additional taxation.
High Rate of Return: The guaranteed return rate is considerably higher than you’ll find in many traditional life insurance and savings policies.
However, the ROP policy does carry some disadvantages as well. For those who may be looking at the advantages, it pays to see what type of issues may not make this particular policy right for you.
High Premiums: In general, the premiums are significantly higher than found in typical life insurance policies. You will need to weigh the options to see if the rate of return is worth the investment.
Interruption Causes Cancellation: An ROP policy needs to have its premiums fulfilled to the fullest otherwise the risk of cancellation is great. For an ROP policy to succeed, a person needs a steady income stream that can withstand changing times and conditions.
Availability: Different states have different rules about life insurance policies and they may not be available everywhere or they may have certain restrictions. Before you start checking around for ROP policies,
However, if the policy is one that last for 20 years or more, then a partial return might be possible in that time frame. You will need to check the specific policy as it may not apply to all ROP life insurance.
Return of Premium Term Life Insurance:
Essentially, this is term life insurance that after a pre-set period of time which is usually 20 or 30 years, you can end the policy and get back all of your premium payments. This ensures that if you outlive the term of the policy itself, all the money that was invested will be returned to you. This will provide a much needed peace of mind that you do not have to start all over again with another term policy because you can use what has been built up over the years as a nest egg.
For example, if you were to take out a $1 million term life insurance return of premium policy and paid $10,000 annually for 30 years. At the end of that time you will be refunded $300,000. There are policies that also add in interest as well.
Although the interest rates are usually not quite as high as they are with some other types of investments, what can be said is that the cash value does go up beyond the premium payments as time goes on thanks to the interest rates.
Return of Premium vs. Term Life Insurance:
Although similar in some ways, there are differences between term life insurance with return of premium policy over standard term life insurance. Understanding the differences will help you make the best choice between which of the policies that you want to choose for your needs.
Lower Rates for Term Life: Generally speaking, you will be paying lower premiums for standard term life insurance because there is no interest build-up or return of your premiums at the end of the term. For example, using sources from a singular insurance company a 37 year old male non-smoker taking out a $250,000 term policy will pay an average of $562 per year. However, adding the return of premium rider will up the cost to $880 per year which adds more than 50% to the cost of the premiums.
Tax-Free Policy: Those who receive the benefits due to the return of investment policy being paid are considered income-tax free as a result. However, depending on the size of the policy they may fall into estate taxes if they are large enough to be included.
Investment Potential: Because many return of premium policies generate an interest rate, you can use them as investments which can help diversify your accounts which will better protect you against the loss of one type of investment. Many investors use them as part of their overall investing strategy and when it comes time to receive the cash value they can re-invest the money if they so desire.
Borrowing: Policy holders can borrow against the cash value if they desire as long as it is earning an interest rate.
Benefits & Catches:
There are certainly many benefits to having a return of premium term life insurance policy, particularly if you are young and healthy. This is because the premium rates are generally lower and if you outlive the policy you can use the money for a number of means.
Get Money Back: The biggest attraction to having a return of investment term policy is that the money you put in over the years is money that you will receive in return if you outlive the term of the policy itself. So, can you get money back from a term life insurance policy? Certainly.
For many, this is the only reason that they obtain this type of policy, particularly if they are getting a healthy interest rate as well.
Borrow Against the Policy: Because the cash value is generating additional income, you can actually borrow against the policy if needed. This can be a valuable option if you need extra cash now to pay off debt.
However, for the many benefits that this type of policy provides, there are some disadvantages as well. Before you choose a return of premium policy, you’ll want to know all about the issues associated with this form of life insurance.
More Expensive than Basic Term: This is primarily a budget consideration, but considering that adding a return of investment rider can mean paying up to 50% or more every month is a big consideration depending on the size of the policy itself.
Cancellation: With return of investment if you should cancel the policy, you’ll lose more that if you simply had regular term insurance which can be quite disappointing to say the least.
The choices are going to come down to whether it is worth purchasing a rider for return of premium insurance compared to simply investing the difference in the money on other options. If you can invest the difference in a tax-deferred or tax-free account, then just using the basic form of the insurance is probably best.
If you have a higher income and are looking for investment opportunities that are safer, then going with such a policy is probably the best since your money will be more guaranteed than trying to invest it into different accounts.
You can compare the rate for free here.
Finding the right ROP policy for your needs should start online as you can compare plans directly. Obviously, if you are working with an insurance company, you’ll want to check out their terms. However, you should not limit yourself to just the few that you know. This is because several companies offer excellent rates for such plan. They provide good terms as well that you can take advantage.
Many insurance companies will allow you to receive a free quote based on length of term, amount of benefit and monthly payment that best suits your budget. For those who want to find the best type of policy, you should start by getting free quotes from a number of different sources.
In fact, you can start from us and get a free quote for a return of premium life insurance policy. All you need to do is fill out a little information and send in the form. Within a short time, you will receive a free quote for what an ROP policy will cost in terms of monthly premiums and provide an interest rate. This will show you how much your benefit will be if you live past the duration of the policy.
By starting with this free quote, you can then find the right type plan to meet your specific needs.