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What Is the ROP Term or Return of Premium Term Life Insurance?


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ROP term or return of premium term life insurance is simply a term life insurance plan with a rider added which gives you a refund on the premiums that you paid for the policy. Note that the refund can vary from company to company so make sure to ask for a full proposal or a brochure explaining in more details what the refund means. I have seen polices that offered a premium refund but, in the end, the refund was just half of the premiums paid.

What happens if I cancel my policy early?

It is a common question I received. Many people seem to think that if a term life insurance plan with a Return of Premium rider (ROP rider) offers a refund, the policy can be cancelled at any time and the client would receive a full refund of premiums paid. I have never seen that it is ever the case. As a matter of fact, in the early years, at least the first five, if you were to cancel your ROP term life insurance, you would receive no refund at all. After the first few years, though, the refund may be prorated based upon a schedule which can greatly vary from company to company.

Which is better, ROP term or no ROP rider?

The question we receive sometimes using the word better cannot be easily answered without knowing each person’s specifics. I will give you some ideas of when you may want to consider the ROP plan. The most common use of this plan seems to be with mortgage insurance. A client with a 30 year mortgage may well benefit from a 20 year term plan with the return of premium rider. Why not a 30 year? Well, if all is calculated well, with a 20 year ROP plan, at the end of the term, the amount of the loan left to repay may be small enough to use the refund from the insurance to pay off or seriously pay down the mortgage loan. For some individuals, the Return of Premium represent an easy way to save some money while being covered for life insurance. Many people don’t like to pay for insurance and see all their money gone. One main reason to avoid the term life plan with refund may be the cost. The monthly premium for this plan can be 50% to 100%+ higher than the basic term life insurance. If you find that you cannot afford the premiums for the ROP plan or are afraid that you may not in the near future, then do not select this plan. Remember, if you cancel in the early years, you will lose everything!

Does it make financial sense to select the ROP term?

Let’s look at it from this angle. Assuming that you need a $ 250,000, 30 year term life insurance policy. Without the ROP rider the yearly rate may be $ 200/year. Now if you add the ROP rider, the rate may go to $ 430/year (these are real numbers form real companies). The difference between the basic term and the Return of Premium term plan is about $ 230/year. At the end of 30 years, with the ROP term you would have paid $ 12,200 and then received a refund for that amount. With the basic term you would have paid, at the end of 30 years, about $ 6,000 but no refund (money gone). If you were to take the difference in price between the premium refund term plan and the basic term life insurance ($ 230/year) and invest it, the only thing you may want to be concerned with is keeping up with the tax that would need to pay on the investment you select. For younger individuals, the Return of Premium plan may work well but with older people (35+), I have not found that it is a good choice unless….

Why should I or should not purchase the Return of Premium plan?

As we have seen from the example above, it would not be so difficult to beat the value of the ROP term. Buying a term policy and investing the rest may work out as well or much better. So why did I add unless? You see, there is another factor to consider here. And that is not a financial factor. My experience has been that most people (a great majority) never invest the difference! This means that at the end of the basic term (not ROP) the policy ends, money was never saved or it was saved sporadically and the “refund” is either nonexistent or very small. You see, the term life plan with refund of your premiums can be an amazing forced saver that may have been and, I have seen, has been a great life saver at older ages. Most people who are not disciplined enough to save the difference, are usually not disciplined enough to invest money for their later years. So, if you are very disciplined then the ROP term is not likely your best choice. If you are not disciplined with money, then please consider the return of premium term life plan. It may not be your best investment move but it is not likely to be your worst either.

Is the refund taxable?

As of today, the refund on the ROP term life insurance is fully tax free as long as the refund does not exceed premiums paid. Since I am not an accountant, I suggest that you still check with your accountant or tax assistant as there may be some variations by states.

What happens to the refund of premiums if I die before the end of the term?

In all cases, I have seen that if you were to die before the end of the term period, the insurance company would pay the death benefit but would not also pay the refund of premium.

How can the insurance company make money?

No worries, the insurance company does just fine. While the insurer can guarantee you a full refund on your ROP term life insurance, as you can see, they have plenty of room to make a profit and give you your refund at the end of the term. Even if their investments need to be on the more conservative side but they still do OK.

I hope this article has given you a better understanding of the Return of Premium term life insurance plan. As we say in all of our articles, always ask a lot of questions before, during and after the application process and carefully review your policy once it arrives. Be well.




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