What Type of Life Insurance uses Return of Premium Rider?

The return of premium rider (sometimes simply ROP) is a life insurance feature that refunds all the premiums the policy owner paid upon meeting certain criteria.  The most common example of this feature is the return of premium term life insurance policy.  For return of premium term life insurance, the policy owner receives all premiums paid back once the premium paying period ends, provided the insured is still alive.

But the return of premium feature is not exclusive to term life insurance policies.  There are several cash value life insurance policies that have a return of premium feature available.

Example of the Return of Premium Rider/Feature

Let's look at an example of a 40-year-old male assumed preferred risk looking to buy a $1 million term life policy with the return of premium feature.  He will pay around $3,760 per year for a policy with a 20 year level premium paying period.

At the end of the 20 year level period, if he is still alive, his total premium payments will equal $75,200.  The insurance company will pay him this $75,200, refunding him all of the premiums he paid.  His death benefit coverage will end at this time.

As you can see, this is a way to extract additional benefit from a life insurance policy beyond the peace-of-mind knowing that you're covered against income loss should you die while the policy is in force.

But you should also understand that the insurance company will only refund the premiums you paid.  There is no interest earned and paid as part of this refund.

What is the Cost of the Return of Premium Rider?

Using the example above, if we remove the return of premium rider from the term life policy, the premium drops to $1,200 per year.  So the rider costs the policy owner $2,560 per year.

Put Money in Piggy Bank

People often ask if the return of premium feature is worth it.  The answer is subjective, and it really depends on what you might accomplish with the money you'll save if you opt-out of the rider.

The most common argument against using the return of premium feature is that you can take the difference in cost and invest it in the stock market.  The claim is that doing this will likely produce more money to you at the end of the premium payment period than the refunded premiums will.  If you did opt out of the return of premium rider and invested the savings, you'd need an annual return compounded for 20 years of 3.5% to match what the rider provides assuming your investment has no fees and you pay no taxes on the gain in the investment (both assumptions are extremely unlikely).

So in this example, you can think of the return of premium rider as a guaranteed 3.5% return on $2,560 saved each year.  If you believe you can do better than that, then you can opt for regular term insurance and do whatever else you wish to do with the $2,560.

Other Insurance Products that Return/Refund Premiums

While return of premium is most closely associated with term life insurance, it's not exclusively a term insurance feature.  Some universal life insurance policies incorporate a return of premium as part of the death benefit option.  If you spend time researching universal life insurance, you'll likely learn that there are two standard death benefit options.  Option 1 (sometimes option A), is the level death benefit option.  Option 2 (sometimes option B) is an increasing death benefit option (usually increasing by the policy's cash value).  But there are some universal life insurance policies that also offer a third option, which is in some ways an extension or alternative of option 2.  This “third” option is also an increasing death benefit, but instead of increasing by cash value, the increase is by the premiums the policy owner pays.  Not surprisingly, this feature is commonly called the return of premium death benefit option.

Additionally, some guaranteed universal life insurance policies offer a return of premium rider/feature.  Guaranteed universal life insurance practically functions are permanent life insurance with no cash value (some people like to call it “term life” with no ending).  With this type of guaranteed universal life insurance, the return of premium option becomes available after a certain number of premium payments.  For example, after 20 years, the policy owner can choose to cancel the policy and receive all the premiums he/she paid back from the life insurance company.

Whole Life Insurance, the OG of ROP

Being a technical blog on the subject of life insurance, we'd be extremely remiss if we didn't mention whole life insurance while discussing return of premium.  The cash surrender value of a whole life policy is a nonforfeiture benefit that originally sought not just to return the premiums a policy owner paid if he/she canceled the policy, but also compelled life insurers to share some of the profits they earned on those premiums (this is why cash surrender value often becomes a number larger than the premiums paid by the policy owner).

So while whole life policies do not have a return of premium feature per se.  They do practically speaking accomplish a refund of premium, and in most cases return the premium with additional dollars beyond those paid by the policy owner.

It's also worth noting that there's no additional cost to a whole life policy to have this feature.  Whole life policies (and technically speaking universal life policies notwithstanding guaranteed universal life insurance) simply provide this benefit without an additional rider cost.

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