Return of premium life insurance, also known as ROP life insurance, is a type of term life insurance. As the name suggests, after the term of your life insurance policy is up, the premiums that you’ve paid into your policy are returned to you if you’re still around to collect them.
Return of premium life insurance may sound like an attractive option—after all, who doesn’t like getting their money back? But it’s not the best fit in every case, and the specifics get a little more complex.
We’ll cover how this type of life insurance works, its pros and cons, and whether or not it might be right for you.
How return of premium life insurance works
The premise is pretty simple: You pay into your life insurance policy for the duration of your term. If you die during the term, your beneficiaries receive a payout in the form of a death benefit, just like with a traditional term insurance policy.
But if you outlive your policy term, you’ll receive all those payments back. Return of premium life insurance may be sold as a stand-alone policy, or you may be able to add a return of premium rider to a regular term life insurance policy (though this isn’t the case with Lemonade’s term life offering).
Return of premium life insurance cons
While return of premium term life insurance may seem tempting, there are a few significant drawbacks. Although this type of policy can help to ensure that your premium payments don’t go to “waste,” you may arguably be able to make better use of your money elsewhere.
- More expensive: Return of premium life insurance is more expensive than traditional term life insurance, which can make it harder for most people to afford.
- Doesn’t account for inflation: When you receive your funds back, they won’t be worth what they were when you paid into the policy, thanks to the effects of inflation. (The $175 premium you paid in November of 2020 won’t have the same buying power when it’s returned to you in November of 2040.)
- Potentially not as good as investing: Instead of sinking funds into a return of premium life insurance policy, you could invest those funds and potentially earn a lot more money. (After all, the insurer that sold you your return of premium policy is likely investing your premiums themselves.) While no investment is a guarantee, if your invested funds were to match the market, they would likely generate significantly more value than your returned premiums.
- You could lose your eligibility: While different life insurance companies have different rules, if you fail to make your monthly premium payments, you could jeopardize the return of your premiums.
Return of premium life insurance pros
At face value, there’s a lot to like about return of premium life insurance. Who wouldn’t want the protection of life insurance coverage, coupled with a money-back guarantee if you live to the end of the term? In practice it’s a little more complicated, but there are some definite benefits to return of premium life insurance, including:
- Great for the risk-averse: Return of premium life insurance may be a choice worth considering for those who want to minimize the chance of “wasted” insurance payments.
- Cheaper than whole life insurance: Like other types of term life insurance, return of premium life insurance is almost always cheaper than a permanent life insurance policy.
- One way to save: Since you receive your premium payments back at the end of the term, a return of premium life insurance policy can work a little like a savings account, enabling you to stash away some funds for the future. (But unlike a savings account, those funds won’t gain any interest over time.)
Other types of life insurance to consider
Return of premium life insurance is one of your life insurance options, but it’s far from the only one. There are a variety of different life insurance policies that could work for you.
Which one is the best fit for you and your loved ones ultimately depends on your finances, your age and health, your comfort with risk, and more.
Our pick: level-term life insurance
Return of premium life insurance is a tempting idea, but it actually may not be the most financially savvy decision. Instead of selecting a return of premium life insurance policy, you may want to consider purchasing a standard term life insurance policy. Lemonade’s term life offering is what’s known as a level-term policy, meaning you’ll pay the same set premium amount for the entire duration.
With term life insurance, you’ll select a term length, generally between a 10-year term and a 30-year term. At the end of the term period, you won’t receive any of your funds back. But, since term life insurance is typically cheaper than return of premium life insurance, you’ll have been able to invest the difference wisely during that intervening period.
Even with an extremely conservative investment, it could be possible to end up with a higher balance at the end of the term. Plus, you can also use the funds you would have sunk into a return of premium life insurance policy to pursue other financial goals, like purchasing a house or saving for retirement.
Don’t just take it from us, of course—this is a great conversation starter for a long chat with a financial advisor.
Deposit term life insurance
If you like the idea of getting your premiums back at the end of a term, but want to match or beat inflation, you might want to consider deposit term life insurance. With this type of term life insurance, you pay a large deposit during the first year of your policy. After that, your premiums will be smaller, but your deposit, which is invested, will grow over time.
At the end of the term, you can withdraw your deposit with interest. Or, if you still need life insurance, you can use those funds to purchase a new policy. Like return of premium life insurance, deposit term life insurance is attractive because of the promise of returned funds at the end of the policy term. But, also like return of premium life insurance, there’s no guarantee that this is the best way to save—you could potentially see better financial results by investing elsewhere.
Whole life insurance
Whole life insurance is a type of permanent life insurance, which lasts for the rest of your life as long as you keep on making monthly payments. The main attraction of whole life insurance is that you never have to buy another policy—it will cover you for as long as you live. You also won’t have to deal with the hassle of medical exams and increased life insurance costs if you try to renew a term life insurance policy as a senior.
In some cases, whole life insurance policies can also be used as an investment vehicle and estate planning tool. Your policy’s cash value will increase over time, and you may even be able to borrow against it while you’re still living.
The main—and significant—drawback of whole life insurance is how expensive it is. Even if you’re relatively young and healthy, whole life insurance can cost a couple of hundred dollars a month or more. There’s a lot of other things you could be doing with those funds, so you should think carefully before deciding on a permanent life insurance policy.
Again, it’s something to ask a financial advisor about as you think about your long-term future and economic security.
The bottom line
Return of premium life insurance offers a twist on a traditional term life insurance policy, where policyholders receive all of their premium payments back at the end of the term. That sounds great on the surface. Although this type of policy has some advantages, it may not be right for your financial situation.
If you’re interested in term life insurance, we’re here to help. We offer term life insurance policies with a quick and easy application process that takes just a couple of minutes, with no medical exam required, and premiums that start at just $9 per month.
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