Return of Premium (ROP): Life Insurance That Returns All Your Money If You Don’t Die

Most of my retirement- focused clients like the cash accumulation potential of indexed universal life (IUL).  For some people though it is just too darn complicated or has too many moving parts.  Some people like (and need) the low cost death benefit protection that term life insurance offers but don’t like the idea of at the end of the term period essentially having nothing.

Here’s a solution for this situation: Term Life with Return of Premium (ROP).  Here’s how it works:  You select a term period, usually 20 or 30 years.  You make your premium payments for the entire term period.  If at the end of the term period you are still alive you get all your money back.  I’ll repeat that: if you don’t die you get all your money back.  If you do die during the term period your beneficiaries get the full death benefit just like regular term insurance.

What’s the catch? The premiums for Return of Premium (ROP) are significantly higher than a similar term product without ROP.  For example[1], a $250,000 30 year term at preferred rates for a 35 year old male non-tobacco with a leading carrier is $27.69/month.  The same policy with ROP is $63.52/month; but at the end of the 30 years the policy holder would get a check for $22,867 or every penny he’d paid in premiums.  Of course, generally speaking, since this isn’t income and is simply a return of premiums paid the proceeds would not be subject to income taxes.

How can the insurance company afford to do this? Well most of my readers are pretty sharp and I’m guessing most of you have a pretty good idea…but simply put the insurance company has had use of your money for 30 years and is able to invest that money for that period of time.  It is able to cover its costs and still offer you your money back.

What happens if you surrender the policy prior to the end of the term?  It varies by contract and you should check with your agent about the specifics of the policy you are considering, but in most cases you receive a partial return of your premiums according to a surrender schedule.  These programs are not suited for someone that isn’t fairly certain they will be able to keep the policy for most or all of the term.

Many of my clients have found ROP to be a nice “sweet spot” for them.  They get the death benefit they need and a guaranteed return. While the death benefit still has a cost (the opportunity cost of not being able to use those premium dollars for other things), it isn’t “throwaway.”  In many ways it acts as a forced savings plan of sorts for them.

If you are interested in looking at rates for yourself or loved ones you can always call me. You can also “do it yourself” with my free, instant, quote tool.  Just select “xx Year Return of Premium” in the “Type of Insurance” Dropdown.