Term Life Insurance With Return Of Premium: Pros And Cons

Life insurance is an essential tool for protecting your loved ones against financial loss in case you die unexpectedly. But what if you don’t die during the term of your policy? Do you get anything back for all the premiums you’ve paid over the years?

That’s where term life insurance with return of premium (ROP) comes in. This type of policy not only provides a death benefit to your beneficiaries if you pass away during the term, but also refunds all of your premiums if you outlive it. Sounds like a win-win situation, right?

Well, not so fast. ROP term life insurance has its pros and cons, and it’s not for everyone. In this article, we’ll explain what ROP term life insurance is, how it works, and how it can give you money back. We’ll also compare its benefits and drawbacks with other types of life insurance and help you decide if it’s worth it for you.

How Return Of Premium Term Life Insurance Works

Term life insurance is a simple and affordable way to get life insurance coverage for a specific period of time, usually between 10 and 30 years. You pay regular premiums during the term, and if you die within that time frame, your beneficiaries receive a lump sum payout called the death benefit. If you outlive the term, however, there’s no payout and your coverage ends.

ROP term life insurance is a variation of term life insurance that adds a refund feature to the policy. With ROP term life insurance, you still pay regular premiums during the term and get a death benefit if you die within that time frame. But if you outlive the term, you get all of your premiums back, tax-free. This is known as the survival or maturity benefit.

For example, let’s say you buy a 20-year ROP term life insurance policy with a $500,000 death benefit and a $100 monthly premium. If you die within 20 years, your beneficiaries get $500,000. But if you survive past 20 years, you get $24,000 back ($100 x 12 months x 20 years).

Sounds like a great deal, right? Well, there’s a catch. ROP term life insurance is much more expensive than regular term life insurance. According to Policygenius, ROP term life insurance can cost up to three times more than regular term life insurance for the same amount of coverage.

That means you could be paying hundreds or thousands of dollars more per year for ROP term life insurance than for regular term life insurance. And if you cancel, lapse, or surrender your policy before the end of the term, you may not get any refund at all (depending on the insurer’s rules).

Another thing to consider is that ROP term life insurance is not widely available from many insurers. Only a handful of companies offer this type of policy, and they may have different terms and conditions for it. For example, some insurers may only offer ROP term life insurance for certain term lengths (such as 15 or 30 years), while others may allow you to convert or renew your policy after the term ends.

Benefits Of Return Of Premium Term Life Insurance

Despite its higher cost and limited availability, ROP term life insurance has some advantages that may appeal to some people. Here are some of them:

• Getting money back if you outlive the term. This is the main selling point of ROP term life insurance. If you’re still alive when your policy expires, you get all of your premiums back without paying any taxes on them. This can be a nice bonus for surviving past the term and a way to recoup some of your costs.
• Having peace of mind that your premiums are not wasted. Some people may feel reluctant to buy regular term life insurance because they think they’re throwing money away if they don’t die during the term. With ROP term life insurance, you don’t have to worry about that because you know you’ll get your money back one way or another.
• Having a tax-free refund that can be used for other financial goals. Getting a lump sum refund at the end of your policy can be a great opportunity to use that money for other purposes, such as paying off debt, saving for retirement, or funding your kids’ education.
• Having the option to convert or renew the policy in some cases. Some insurers may allow you to convert your ROP term life insurance policy to a permanent life insurance policy (such as whole or universal) that lasts your whole life and builds cash value. This can be a good option if you want to extend your coverage and access the cash value of your policy. Alternatively, some insurers may allow you to renew your ROP term life insurance policy every year after the term ends, but at higher rates.

Drawbacks Of Return Of Premium Term Life Insurance

ROP term life insurance is not a perfect solution, however. It also has some drawbacks that may outweigh its benefits for some people. Here are some of them:

• Paying significantly more than regular term life insurance. This is the biggest downside of ROP term life insurance. You have to pay a lot more for the same amount of coverage as regular term life insurance, and that extra money could be better used elsewhere. For example, according to Investopedia, a 35-year-old male in good health could pay $30 per month for a 20-year, $500,000 regular term life insurance policy, or $90 per month for a 20-year, $500,000 ROP term life insurance policy. That’s a difference of $60 per month, or $14,400 over 20 years.
• Losing the refund if you cancel, lapse, or surrender the policy. If you don’t keep your policy until the end of the term, you may not get any refund at all. This can happen if you miss a payment, cancel your policy, or surrender it for cash value (if available). Depending on the insurer’s rules, you may only get a partial refund or none at all. This means you could end up paying more for nothing.
• Missing out on potential returns from investing the extra money elsewhere. Another drawback of ROP term life insurance is that you’re giving up the opportunity to invest the extra money you’re paying in premiums and earn a higher return than the refund. For example, according to Forbes, if you invested the difference between a regular term life insurance policy and an ROP term life insurance policy in a diversified portfolio that earned an average annual return of 7%, you could end up with more money than the refund after 20 years.
• Having limited choices of insurers and terms. As mentioned earlier, ROP term life insurance is not widely offered by many insurers, and those that do offer it may have different terms and conditions for it. This means you have fewer options to compare and shop for ROP term life insurance policies than for regular term life insurance policies. You may also have trouble finding an ROP term life insurance policy that matches your desired term length or coverage amount.

Alternatives To Return Of Premium Term Life Insurance

If you’re not convinced that ROP term life insurance is right for you, don’t worry. There are other options that can provide similar or better benefits than ROP term life insurance. Here are some of them:

• Buying regular term life insurance and investing the difference in cost. This is probably the best alternative to ROP term life insurance for most people. You can buy a regular term life insurance policy that meets your coverage needs and budget, and then invest the difference between what you would pay for an ROP term life insurance policy in a savings or investment account. This way, you can get both protection and growth for your money, and potentially end up with more money than the refund from an ROP term life insurance policy.
• Buying a permanent life insurance policy that builds cash value. If you want a life insurance policy that lasts your whole life and gives you access to cash value, you can consider buying a permanent life insurance policy (such as whole or universal). These policies are more expensive than term life insurance policies, but they have some advantages over ROP term life insurance policies, such as:
  • The cash value grows tax-deferred and can be used for any purpose
  • The cash value can be borrowed against or withdrawn without affecting the death benefit
  • The cash value can be used to pay premiums or increase the death benefit
  • The death benefit is guaranteed as long as premiums are paid
• Buying a hybrid policy that combines life insurance and long-term care insurance. If you’re concerned about paying for long-term care expenses in the future, you can consider buying a hybrid policy that combines life insurance and long-term care insurance. These policies are also more expensive than term life insurance policies, but they have some advantages over ROP term life insurance policies, such as:
  • The death benefit can be used to pay for long-term care costs if needed
  • The death benefit is reduced by the amount of long-term care benefits paid out
  • The premiums are guaranteed and will never increase
  • The premiums can be refunded if the policy is canceled

Conclusion

Term life insurance with return of premium is a type of policy that refunds your premiums if you outlive the term. It can be a way to get money back from your life insurance policy and use it for other financial goals. However, it also has some drawbacks, such as higher cost, limited availability, and opportunity cost.

Before you buy ROP term life insurance, you should weigh its pros and cons and compare it with other types of life insurance. You should also shop around for quotes from different insurers and consult a financial advisor if needed.

Life insurance is a personal decision that depends on your needs, goals, and budget. ROP term life insurance may be a good option for some people, but not for others. The important thing is to find a policy that gives you peace of mind and protects your loved ones.