15 Pros and Cons of the Return of Premium Life Insurance

Most forms of life insurance are fairly straightforward. If you purchase term insurance, for example, then your beneficiaries receive the amount awarded in the death benefit portion of the policy. You then pay a monthly premium to keep that policy active. Most forms of insurance give you access to specific benefits in exchange for the costs you pay to maintain the policy. That means you lose the funds unless something happens to you, and then your designated beneficiary receives the payout.

A return of premium (ROP) life insurance policy is a little different. When your term is up and you’re still alive, then you’ll receive the amount you paid over the lifetime of the policy as a lump-sum check. If you paid $100 per month for a 10-year policy, then you’d receive $12,000 back. It is available as a policy or a rider on a more traditional term-life policy. There may be fees or additional riders that reduce the full value of the return.

The pros and cons of an ROP life insurance policy show that you’ll be paying more to receive this benefit, with a markup of almost 30% possible. If you survive through the entire term, then you’ll get that money back.

List of the Pros of Return of Premium Life Insurance

1. If you survive, then you get a refund.
Having life insurance is a good thing. It will give your family some financial security if something happens to you for almost any reason. Spending money on a policy feels like a legitimate investment. The only thing that is better with an ROP life insurance plan is that you receive a full refund of your premium if you end up not using the policy. That means you don’t need to take a lot of risks to provide your family with the protection they need. You can then put that money on return into your retirement savings and start a new policy if you want.

2. It becomes a forced savings vehicle for your finances.
Some people view a return of premium life insurance policy as if it is a forced savings vehicle. If you struggle to put money away and want to make sure there is something saved for later in your retirement, then this option will give you protection for a term of 10-30 years depending on what you need. If something happens to you, then the death benefit will pay out to your designated recipient. If not, then you’re rewarded with the money you put into the policy. It won’t grow like a 401(k) or IRA would, but it will give you a guaranteed amount to use when you’re ready to stop working.

3. The amount you receive from the insurance policy is tax-free.
Because you are receiving a refund of your premium amount with an ROP policy, the funds that the provider gives you at the end of your term are free from taxes. You’ll typically receive a 100% refund, but fees and additional riders could reduce the amount that you receive. You’ll want to speak with your agent to determine what the exact amount will be before signing any documents or paying your first premium.

4. It is an affordable life insurance option for the average person.
Most people can secure an ROP life insurance policy for less than $1,000 per year with $250,000 of coverage for a death benefit. Even when you look at that cost over time, you’ll spend 10% of the policy overall to protect the finances of your family if something were to happen to you. If you are in excellent health, then the cost of a policy could be less than $600 per year. That puts this option in the realm of affordability for the average person wanting some extra financial protection over the next 10-30 years.

5. Some policies offer a cash-value option with the ROP.
State Farm provides a cash-value option that builds within the policy over time. That means a portion of each premium you pay goes toward a cash account. You can then take out loans or withdrawals against that amount. If you don’t repay the loan, then your death benefit would be reduced by the amount removed. You’ll lose some of the money back from the ROP feature if you don’t die. You also have the option to convert them to whole life insurance to keep your coverage if you would prefer a permanent policy one day.

If a conversion is permitted, as it is with Kansas City Life Insurance Company, then you don’t need to provide proof of insurability to proceed with the transition. Some may let you continue life insurance coverage without further premium outlays either in lieu of a complete refund after the term.

6. You’ll still eliminate the financial worries of your family.
For the length of your policy, you can rest worry-free that your family has some financial protection if you happen to die prematurely for any reason. Even though you won’t be around, you’ll give your family the help it needs to take care of your final expenses, pay for college, and recover from the event. You can choose from a variety of terms with most providers, with a handful of providers going up to 35 years for some people. You get to have some flexibility over the company you choose, the coverage you want, and the duration of the policy as well.

List of the Cons of Return of Premium Life Insurance

1. The cost of a policy could be outside of your budget.
Most young adults and families avoid an ROP life insurance plan because the expense is too high. Term life is usually a better deal, providing $500,000 in coverage for less than $30 per month for most healthy people. Instead of paying 30% more to guarantee the return of your premium, you could invest the difference between the term policy and the ROP to gain more in your retirement account over time. A few decades of compound interest on $20 to $40 per month can add up quickly over time.

2. There may be fewer options available to you if you select the ROP option.
Some people find that they are limited to the return of premium policies that are available in their region. Some insurers might offer specific term lengths or minimum coverage amounts that don’t entirely cover your needs. Even if you can add more flexibility to the plan with premium riders or cash-value components, you’ll want to keep this disadvantage in mind while you evaluate policies and providers. There might be a different form of insurance that can protect you more effectively.

State Farm requires a term length of 20-30 years with coverage levels starting at $100,000. Issue ages are between 18-60, but the longest policy has an age restriction of 45 or younger. Coverage rates for $250,000 at 20 years start at $49.59 per month, but individual quotes can differ.

3. Your geographic location will be a determining factor in your final cost.
Many of the rates that you will see quoted in the advertising of an ROP life insurance policy are based on where you live. Providers consider the access to care that you receive, along with other lifestyle factors based in that region, to determine what your final rates should be. Someone living in the Midwest, for example, will often have a cheaper policy than someone who lives along the West Coast. Why is there such a difference? Because there is a greater risk of natural disasters. Living in Wisconsin won’t put you at risk for a volcanic eruption, earthquake, or a tsunami like living in Washington does.

4. Non-health factors can impact your ROP quote.
Using State Farm’s system for health evaluation, you’ll find that there are some bullet points that could put you into a lower wellness category even though it doesn’t impact your physical health. You will drop from the “excellent” category to “very good” even if you have just one traffic violation in the past two years. You’ll drop to the “good” category if your family has a history of heart disease or cancer even if you’ve never been diagnosed with a chronic illness. If that traffic violation happened in the past year, then you can drop three levels immediately, going from “excellent” to “average” until the violation is 13 months old.

5. You may not qualify if you have high blood pressure numbers.
State Farm will qualify you in the average category if your blood pressure is generally less than 135/90. If one of those vital statistics is off, then you might be denied coverage for ROP life insurance. You might have other options available to you, but it won’t give you the return benefit that you want. Then you’ll need to hold the policy for the entire term of it to get your money back. If you’re purchasing a long-term option, that means you won’t see anything come back to you for 30 years or more.

6. You might not receive any money if you cancel your policy.
The ROP is usually a rider that gets added to a term life policy. Because of this structure, some of the largest life insurance companies in the United States do not provide this coverage option. If you decide to cancel your policy before you reach the term, then there may not be any way to get the money back you paid into it. This disadvantage depends on what the policy actually says will happen if the cancellation occurs. If you stop paying the policy, you might experience this outcome as well.

This disadvantage is enough of a drawback to stop many people from choosing ROP over something like term. At the height of its popularity, this option made up about 5% of total industry sales. That figure has dropped to about 2% of total sales today.

7. You don’t earn interest on your money.
Inflation impacts the premium amount that you eventually have returned to you over the lifetime of the policy. Since the payment doesn’t occur for up to 30 years down the road, the total value of what you “saved” is going to be significantly less than what you actually paid for the right to have coverage in the first place. Using a standard inflation calculator, the price of an item purchased at $1 in 1989 would cost you $2.07 today. That means you could take a valuation hit of 30% for the money since you don’t earn interest while paying 30% more for the policy. It won’t be worth as much once the refund comes through.

8. A medical exam may be necessary to receive coverage.
Some insurance providers put specific health statistics into their evaluation process to ensure that your policy goes into the correct risk pool. That means a complete physical that includes cholesterol testing may be necessary before you can receive coverage under your preferred ROP life insurance policy. If your vitals don’t fit into the categories, then you’d be out the cost of the appointment with no insurance option available. If you’re unsure about the status of your health, then a life insurance policy that doesn’t require an exam may be a better option.

9. There is no guarantee that the insurance company will stay in business.
If you purchase a 30-year ROP life insurance policy from a provider that hasn’t been in business that long, then there is a lack of trust that will permeate this relationship. Some people don’t like the idea of paying for a product that comes from a company that might file for bankruptcy protection in the future. During a significant financial collapse like the world experienced in 2008, there might not be a way to recover the premiums paid into the plan over time. You will want to choose a policy issued by a provider with a robust financial rating and strong outlook for the future to provide the best safety net possible.

The pros and cons of the return of premium life insurance involve the amount of risk that you’re willing to take on to protect your family’s finances. It can force you to start saving some money if you’re budgeting skills are poor, but this option may also reduce the eventual amount you receive if you were to invest in more traditional ways. You’ll want to talk to a professional financial advisor and evaluate other coverage options before settling on a ROP option.