Term Life Insurance: Are Premium Refunds Possible?

Term life insurance is usually non-refundable, but there is an option to add a return of premium (ROP) rider to your policy. This means that if you outlive the policy term, you will be refunded all or some of the money you spent on policy payments. Without this rider, your policy will expire without a payout if you're still living when the term ends.

Return of Premium (ROP) Life Insurance

Here's how ROP works: you make monthly or annual payments to keep the policy active. If you pass away while the policy is in effect, your beneficiaries will receive the death benefit. However, if you outlive the term, you will be refunded some or all of the premiums you paid, depending on the type of ROP option you purchased. This refund is typically tax-free.

It's important to note that if you stop making premium payments or cancel your policy, you may not get your premiums back. The rules regarding this vary depending on the insurer. Additionally, the refund may not include fees or other riders on the policy.

Some people may find ROP appealing as it provides peace of mind and added security when purchasing life insurance. It can also function as a savings account, especially if the payout coincides with retirement. However, it is generally much more expensive than traditional term life insurance, and the money you get back won't have earned any interest. Therefore, for most people, it may be more beneficial to opt for a traditional term life insurance policy and invest the difference.

ROP Riders

Term life insurance is usually an affordable alternative to more expensive permanent life insurance options. However, a return of premium (ROP) rider on a term life insurance policy can be two to three times more expensive than a regular term life insurance policy.

A return of premium (ROP) rider is an optional add-on to a term life policy. If you outlive the policy term, an ROP rider will pay you all or some of the money you spent on policy payments. Without an ROP rider, if you're still living when the policy term ends, your policy will simply expire without paying a benefit.

If you purchase an ROP rider with your term life policy, you'll make monthly payments to keep your policy active. If you're still living when the policy term ends, the insurance company will pay you back all or some of the money you spent on payments, depending on your policy, in the form of an ROP benefit.

The money you get back from your term life insurance with an ROP rider may not be taxable, unless there's a gain. Consult a financial advisor to understand these potential implications. The refund might not include fees and other riders you have on the policy, and missing payments can disqualify you from getting your ROP benefit.

If you die during the policy term, your beneficiaries can claim the death benefit, just like with any other life insurance policy.

A return of premium rider is typically for risk-averse individuals who can afford the increased monthly premium and want financial protection for their loved ones. It provides added security when purchasing life insurance. Plus, depending on your policy term length, your return of premium could line up with your retirement age, providing a benefit around the time you stop earning an income.

Pros and Cons of ROP Life Insurance

Return of Premium (ROP) life insurance is a type of term life insurance that refunds your premium payments if you outlive the term of your coverage. Here are some pros and cons to help you decide if ROP life insurance is right for you:

Pros of ROP Life Insurance:

• Refunded premiums can act as a forced savings account, especially if you are risk-averse.
• Premiums are refunded after a short period, depending on the length of the policy term.
• Refunded premiums are not taxable.
• ROP policies may cost less than whole life insurance and other types of permanent life insurance.
• ROP plans offer guaranteed maturity proceeds, along with additional bonuses and coverage factors, making them a combined insurance and investment platform.
• Under the Income Tax Act, 1961, the payable premiums are eligible for tax benefits.
• If the policyholder does not survive the policy term, the nominee(s) are eligible to receive the entire sum assured, just like a traditional term plan.
• ROP plans offer the option of discontinuing the plan and receiving a refund of premiums paid to date.

Cons of ROP Life Insurance:

• ROP policies are more expensive than basic term life insurance policies.
• The additional premium costs are usually better invested or saved elsewhere, offering higher returns and lower fees.
• The value of refunded premiums is depreciated due to inflation.
• Many insurers don't offer an ROP rider, so finding the right policy may be challenging.
• If you terminate your policy early or miss premium payments, you may not get your premiums back.
• You are essentially providing an interest-free loan to the insurer.

ROP vs Traditional Term Life Insurance

Return of Premium (ROP) term life insurance is a type of term life insurance policy that provides a death benefit to your beneficiaries if you die during the term of your policy but refunds the premiums paid if you outlive the policy term. On the other hand, with a standard term life insurance policy, you won't receive any payout if you outlive the term.

ROP Term Life Insurance

ROP term life insurance is a type of insurance policy that allows you to collect your premium payments if you outlive the selected term. This type of insurance plan can be more expensive than traditional term life insurance. ROP policies tend to have fewer term options available, such as only a 20- or 30-year term period. If you pass away during that time, your beneficiaries will receive a death benefit, but if you outlive that period, you will be able to get a refund of your premium payments.

Traditional Term Life Insurance

Traditional term life insurance is a type of policy that provides coverage for a specific period, often ranging from 10 to 30 years. During this time, the insured individual pays regular premiums to keep the policy active. If they pass away during the term, their beneficiaries will receive a death benefit. However, if the policy term ends and the individual is still alive, the policy simply expires without any refund or payout.

Key Differences

The main difference between ROP and traditional term life insurance lies in what happens when the insured person outlives the policy term. With ROP, the premiums paid during the term are refunded, whereas traditional term life insurance provides no refund or payout in such cases. Additionally, ROP tends to be more expensive and has fewer term options available.

The choice between ROP and traditional term life insurance depends on individual preferences and financial circumstances. ROP may appeal to those who want the added benefit of a refund if they outlive the policy term. However, it comes at a higher cost. Traditional term life insurance, on the other hand, may be more suitable for those who want a more affordable option and are comfortable with the possibility of not receiving a refund if they outlive the term.

ROP Policy Options

Return of Premium (ROP) term life insurance is a type of policy that provides a death benefit to your beneficiaries if you die during the term of your policy but also refunds the premiums you have paid if you outlive the policy term. ROP insurance is usually offered as a rider or add-on to a standard term life insurance policy, but it can also be purchased as a standalone policy.

Mutual of Omaha

Mutual of Omaha is a good option if you want a same-day decision on coverage and want to skip the medical exam. They offer a terminal illness living benefit on their ROP policies, which allows you to convert your policy to a permanent life insurance policy until the end of the policy term or your 70th birthday, whichever comes first. They also offer a wide range of riders, including a waiver of premium rider, accidental death benefit, and children's term rider, all for an additional cost. However, they only offer a 30-year term for ROP policies.

AAA Life Insurance

AAA Life Insurance offers ROP policies with terms of 15, 20, or 30 years, giving you more flexibility in choosing the length of your coverage. They also allow you to apply for coverage without a medical exam. However, they do not offer any riders on their ROP policies.

Assurity

Assurity is a certified B corporation, committed to social equity and environmental responsibility. They offer flexible conversion options and a range of riders, including a disability waiver of premium and a critical illness benefit. You can apply for coverage without a medical exam, but it must be done through an agent. Their financial strength rating is lower than some of the other options, but they receive fewer customer complaints.

State Farm Life Insurance

State Farm has the highest financial stability rating of A++ from AM Best, indicating strong financial stability and a high likelihood of being able to meet its contractual obligations. They have very few customer complaints and rank first in J.D. Power's 2021 customer satisfaction survey. They offer 20 and 30-year terms and allow you to add riders such as a premium waiver or children's term rider. You can also bundle your coverage with a State Farm auto policy for additional discounts.

John Hancock Life Insurance

John Hancock stands out for its wellness perks, offering discounts and rewards for healthy living through its Vitality PLUS program. They offer ROP policies with 25 and 30-year terms and may not require a medical exam. Their policies include a terminal illness rider at no extra cost. However, they only refund up to 75% of premiums paid at the end of the policy term, and the policies are not convertible to permanent coverage.

When considering ROP policy options, it is important to compare the costs, financial strength, customer satisfaction, convertibility, and available riders to find the best fit for your needs and budget.

Frequently asked questions