What Is a Return of Premium (ROP) Life Insurance Policy?

At the company that I previously worked for the Return of Premium Life Insurance Policies were the new thing. They had two different versions. There was the ROP-20 & ROP-30. That’s a 20 year term and 30 year term policy. So what’s so great about this policy versus other ones out there? Well, the selling point is that if you outlive your policy all premiums paid in are returned to you when the term expires. What you can expect from this type of policy: It’s a great policy if you can afford it. The premiums are generally more expensive than normal term policies. But, if you have the money to pay for it then it’s a great policy. It’s sorta like a Savings Account that you can’t touch. At least that’s how I approached it when I sold this type of policy. Also, with most term insurance policies you can usually convert the policy to a type of permanent insurance if your needs change. The features of the policy can vary from company to company, but here are some of the features that were offered at the company I worked for:

Dividends – This policy does allow for them, but as with other policies they are never guaranteed.

Premium Banding – This type of policy will normally offer rate bands. Usually you will see something like banding at $250,000, $500,000 and 1 Million. Typically with banding the premium per $1,000 of coverage will decrease as the amount of coverage you bought moves into the higher bands. So if your thinking about purchasing a policy with a death benefit of $200,000, it could possibly be cheaper or more beneficial for you to purchase $250,000 because of the premium band.

Riders – With the ROP, usually there are not as many riders offered. You will probably see the “Wavier of Premium” and “Children’s Term Rider” You will want to double check though that the premiums you pay in for the riders will be returned to you. Not all companies will return the premiums for some riders.

Loans – You can still take out a loan against the cash value on your policy. With these policies the Cash Values usually starts a little later, with most companies it’s around the 5th policy year. At the company I worked for the cash value was equal to a percentage of all premiums paid into the policy. Then the percentage increases each year after the 5th year until it reaches 100% of the total premiums paid at the end of the term. Don’t forget that you are still charged interest on your loan. Also, any death benefits will be reduced by any outstanding loans and interest you may have. Some companies also offer “Automatic Premium Loan Provisions” With this, if your at the end of your Grace Period and the premium due has not been paid, a policy loan will automatically be made from your policy’s cash value to pay the premium. This is to prevent the unintentional lapse of your policy. This is usually an option on the application when you sign up for the insurance.

Renewability – As with most Term policies, this type of policy is renewable annually after the initial term period with annually increasing rates. So if you get the ROP-20, then on year 21, you would be able to renew this policy each year.

Death Benefits – The death benefit is paid to the beneficiary, federal income tax free, as long as the policy is still in force. If the insured person dies prior to the end of the term, the Return of Premium Benefit is not paid in addition to the face amount. All the premiums paid up to that point and any cash value would be kept by the company. They would however pay out the death benefit, but you can not have both.

Taxes – The Return of Premium benefits are taxed, but only to the extent that premiums paid for a WPD (Wavier of Premium Rider) are returned. Tax laws do not allow for inclusion of WPD premiums. So, only those portions of the premiums paid for a WPD Rider are taxable. Keep in mind that not all companies return the premiums paid for the WPD rider, so this would only apply if your company does. So is it worth the extra money? This really depends on how you look at it. With most term policies, it’s sorta like your renting a house. You pay your monthly Premiums (rent) but when your term expires you have nothing to show for it. The return of premium policy is the exception to this. That is usually the biggest complaint about Term policies. You pay in but have nothing to show for it in the end. But, with the ROP, if you outlive your policy then you get all your premiums back. So it sounds like a win/win to me.

During my time in the insurance industry I did sell a ROP-20. It was to a younger couple who was planning on using the money to pay for their child’s educational costs in the future. They figured that in 20 years, their child would be going to college and the Returned Premium would be a great way to help pay for that. So I personally think it’s a good policy to check into. As with any policy their are pro’s and con’s so it’s a good idea to sit down with your agent and go over all your life insurance options. There are many Life Insurance policies to choose from and now you can say that you know about one more.