A return of premium life insurance policy may seem like the ideal choice. It pays back some of the funds or even all of the funds you pay into the life insurance policy if it does not cash out. Is this type of life insurance the right option for you? It can be beneficial in some cases. However, there are limits.
How Does Return of Premium Life Insurance Work?
Sometimes called ROP insurance, return-of-premium is a form of life insurance.
If you purchase a term life insurance policy, you typically pay for it for a set number of years. If you die during those years, the policy goes to work. It pays your beneficiary the amount of the policy's death benefit. If you do not, the most common forms simply expire. You don't get anything back.
A return of premium policy aims to pay you back the money you put into it all of those years. Some pay back at 100 percent of the premium you put into the policy throughout those years. Therefore, you'll essentially get your money back.
For example, let’s say you pay $100 per month over 10 years into the term life insurance policy. That’s $12,000. At the end of the 10 years, the insurer pays you back those funds. Or, some policies add it as a rider to a new term policy you put into place. Some differences apply. You may not get back as much. You may have to reinvest some of it. It depends on the rules your insurer sets.
What Are the Drawbacks of Return of Premium Coverage?
There are obvious benefits here. You do not lose any of the money you put into the policy throughout that time. However, these policies tend to be significantly higher in cost than others. Sometimes the additional charge is as much as 30 percent higher. Even with this cost, many people would use it because it offers money-back protection. So, you might pay more now, but will get money back later.
Not all life insurance companies offer a return of premium plan. Some experts say you would make more money by avoiding this, buying a cheaper policy, and investing that markup elsewhere. However, often there are no taxes paid on the money you put into these policies. You usually do not pay taxes when they become accessible to you either. Some exceptions apply, however.
Take into consideration how well they work for you. Discuss all of your options with your agent. Determine if buying this type of life insurance is the best option for your situation at the cost provided.