What is a Return of Premium Life Insurance Policy?

Would you pay an extra amount of premium each year on your auto insurance coverage if you knew you could get back all your money if you didn’t file a claim? That’s a gamble that many people would surely take – especially those with a clean driving record.

Would you pay more for life insurance if a life insurance company returned all your premium if you didn’t die during the term period that you bought the policy?

Well, life insurance companies offer a similar type of option through a life insurance rider called Return of Premium.

Can You Really Get Free Life Insurance?

Here’s how Return of Premium Life Insurance works.

When a person applies for life insurance coverage – for instance, a 30 year term insurance policy – they could pay an additional amount of premium, and should they still be living at the time their policy expires, their premiums would all be returned to them as a return of the premiums paid over the policy period.

Although the return of premium life insurance, or ROP, can be more costly than just simply purchasing level term insurance coverage, for some people, this option can essentially amount to getting years worth of life insurance protection for free.

The Best Companies for Return of Premium Life Insurance

While there are a number of insurance carriers that offer the Return of Premium rider, there are a few such as PrudentialAmerican General and Assurity that come out ahead in terms of having a lower premium – and this can make a big difference over the long term. Your cost will depend on your rate class, age, term length and many other factors.

Let’s take a look at an example here.

Jeff is a 37-year old male. He is comparing Prudential 30 year term life policies for $250,000 in coverage, with and without the Return of Premium Rider.  Jeff isn’t sure what class of policy he will be placed in, so our quote system offers you the ability to see all of your options – which saves you a substantial amount of time.

If Jeff can qualify for a Preferred Plus rates class.  With the return of premium term life insurance rider, Jeff would pay $56.29 and without the ROP rider Jeff would pay $27.90.  

Cost Without ROP

money back insurance policy

Cost With ROP

what type of insurance would be used for a return of premium rider

Pros and Cons of Money Back Life Insurance

While free life insurance – or free anything – may at first sound like a great deal, it’s important to ensure that it will be worth it to you. With that in mind, there are a few return of premium life insurance pros and cons to consider prior to adding the required extra premium amount to your policy.

First, if you’re young and healthy – in your 20s or 30s, for instance – ROP term life insurance can cost much less in comparison to waiting until you’re in your 40s or 50s. Those who are older will tend to pay much more, though.

Even so, it could still possibly be well worth it, provided that you are in good health and you have a long life expectancy. Also, you could possibly view your policy as a type of investment – even though it technically isn’t.

For instance, in the example of the Standard coverage option above, Jeff would have had to pay an extra $46 per month ($54 versus $100) for 30 years in order to get back his premium. This amounts to a total return of premium of $16,560.

These are funds that Jeff is basically setting aside every month – and, if returned to him, the IRS considers this money as a return of premium, not income or a capital gain – so these funds will be 100% tax-free to him.

Sometimes term life insurance with return of premium make since. Just like shopping for any other type of bigger ticket item, it’s worth it to at least check out your options when it comes to Return of Premium life insurance, as you could end up protecting your loved ones at no out-of-pocket cost to you.

Pros Cons
Money Back if you outlive the policy Higher initial premiums
Tax free ROP Not much competition from carriers
Forces you to save Ni interest earned on premiums