If you’re on the fence about buying life insurance because you can’t fathom the thought of paying for a policy you probably won’t use, consider the Return of Premium Life Insurance policy.
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This policy is gaining popularity again, despite being around for many years already. It’s an excellent plan for those who keep up with their premiums, have a steady flow of income, and are resistant to invest in life insurance since they’re in good health and think they won’t need a term life insurance policy.
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What is A Return of Premium Life Insurance?
A return of premium life insurance does just what it says – it returns your premiums if you outlive the policy.
For example, let’s say you took out a 10-year term life insurance policy, and at the end of the 10 years, you’re still alive. Your policy cancels, and you just spent thousands of dollars on a policy you didn’t need.
It’s good practice to have life insurance because life is unpredictable. Even if you’re in the best health today doesn’t mean something can’t happen in the next 10 years.
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But, if you’re alive and you had a return of premium life insurance policy, you could receive most of the premiums you paid back. The ‘Return of Premium’ clause entitles you to the premiums minus fees they charge plus interest earned.
It’s like forced savings account with the benefit of protecting your loved ones if the unexpected occurs.
How Does It Work? [Important]
In a typical term life insurance policy, you don’t receive your premiums back if you outlive the term. The policy expires, and you don’t have life insurance or the money you paid.
With a return of premium policy, you earn most of the principal back (minus fees) if you outlive the policy. Of course, there’s a chance you won’t outlive the policy, which means you’ll pay higher premiums for no reason, but that’s a chance you take.
Is Return of Premium Life Insurance Worth It?
There are both good and bad sides to the ROP life insurance. Understanding both sides can help you determine if a senior life insurance with return of premium feature is worth it.
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Earn your Premiums Back with Interest
This is the main benefit of ROP policies. You invest your money, earn interest and get it back (if you’re alive). You can use the funds however you want, whether to pay for college, retirement, or any other financial need. There are no restrictions.
Higher Premium Cost
ROP policies without medical exams have much higher premiums. Suppose you haven’t set yourself up with a retirement fund, emergency fund and taken care of other financial obligations. In that case, the higher premium cost could be a reason not to invest in it.
Maybe a Good Investment Strategy
Weighing the above factors can help you determine if an ROP policy is right for you. If you are financially secure and have maxed out your investments in most areas of your life including retirement, emergency savings, college savings, and rainy day funds, you could be a good candidate for such policy.
But, if you haven’t set yourself up financially yet or you haven’t secured a steady job and income, focus on the other areas of your financial life first, choosing an ROP policy once you’re settled.
Return of Premium Life Insurance Pros and Cons:
As with any insurance policy, there are benefits and catches to consider when looking at return of premium life insurance policy.
- Flexibility: You get the same flexibility as term life insurance including choosing the time period, benefit, and premiums.
- Return of Investment: You may receive a return of most of your investment in your life insurance policy if you outlive it.
- Non-Taxable: You won’t pay taxes on the return of premiums received since you paid the premiums with after-tax dollars.
- High Rate of Return: The guaranteed return rate is considerably higher than you’ll find in many traditional life insurance and savings policies
- High Premiums: Most ROP policies have premiums higher than typical life insurance policies.
- Interruption Causes Cancellation: If you don’t make your premium payments on time, you could lose the opportunity to earn your premiums back. If you don’t have a steady income, it’s not a good choice.
- Availability: Different states have different rules about life insurance policies. ROP policies may not be available everywhere.
Return of Premium Term Life Insurance
We’ve discussed how the premiums on return of premium policies are higher, but here’s an example to show you how it can be beneficial if you’re in the right situation.
Let’s say you took out a $1 million term life insurance return of premium policy. During the 30-year term, you paid $10,000 annually. At the end of the term, you’d receive $300,000 plus interest.
While you may find investments with higher rates of return, there is no risk in your ROP policy. You don’t have to worry about the market crashing or other factors affecting your investment.
Return of Premium vs. Term Life Insurance:
Both type of policy sound similar, but ROP policies have an advantage over term policies.
Here are the differences so you can choose what’s right for you.
Lower Rates for Term Life
Term life insurance usually costs less because there’s no risk for the insurance company. They don’t have to pay interest or return your premiums at the end of the term.
For example, a 37-year old non-smoker taking out a $250,000 term policy will pay an estimated $562 per year. If you add the return of premium rider, the premium increases to $880 per year.
A return of premium policy is like an investment. If you have a robust investment portfolio, it can be an excellent way to diversify your portfolio with a ‘good investment.’ You don’t have to worry about it decreasing in value, and it will have cash value at the end of your term, which you can then reinvest the funds.
If you’re struggling to calculate cash surrender value, head over to here to learn about it.
With a term policy, you don’t get your money back. Any money you pay to your life insurance, you cannot reinvest.
You have the option to borrow against your life insurance cash value, but if you die before you pay it back or you don’t pay it back, your death benefit is reduced. This also reduces the interest you’ll earn on the premiums paid.
Term life insurance doesn’t have a cash value for you to borrow against. It’s only valuable to your beneficiaries if you die within the term.
Suppose you have a higher income and are looking for safer investment opportunities. In that case, as an elderly, going with such a policy is probably the best since your money will be more guaranteed than trying to invest it into different accounts.
Not all life insurance companies offer a return of premium life insurance. Just like any life insurance, though, you should shop around to find the best deal. Use our tool to compare ROP life insurance premiums for seniors to find the right option.
Where to Buy ROP Life Insurance?
Here are a few of the top life insurance companies offering the return of premium life insurance.
- State Farm: Choose from a 20 or 30-year term policy with a return of premium rider and enjoy fixed premiums.
- AAA: Choose from 15, 20, or 30-year term policies with a ROP rider
- Country Financial: Choose from a 20 or 30-year term policy with a ROP rider
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What is the catch with a return of premium life insurance?
It sounds like there should be a catch, and there is – higher premium. You pay for the right to earn the premiums back. It’s the insurance company’s way of protecting themselves. Otherwise, they’d all be out of business.
Expect to pay up to 30% more in premiums for ROP policies versus term life policies.
Which is the best term plan with a return of premium?
Each life insurance company offers different policies. You may secure a policy for 10, 15, 20, or 30 years depending on the company. Always shop around and ask about all your options to determine the right plan.
Is a return of premium life insurance worth it for the elderly?
This is a personal decision. Is it worth it if you have a steady income and you’ve already invested in other areas of your life? It can be, especially if you have a significant expense occurring in 10 – 30 years. But if you don’t have a solid income or haven’t invested in other areas of your life, it may not be worth it.
What happens to the money at the end of term life insurance?
A typical term life insurance policy expires, and that’s it. You have to apply for a new policy or renew the existing one, but you never get your premiums back. If you want the option to have a return of premiums, you must pay for the rider.
Get your Return of Premium Quotes
Don’t buy new life insurance without getting quotes. Every company offers different terms, premiums, and even interest rates on such policies.
If you’re looking for the best policy for you, start here and get your free quote. With just a little information, we can secure you the best quotes for a return of premium policy so you can see if it’s right for you.