What Is Return of Premium Life Insurance?
- Find out what return of premium life insurance is. Explore its pros and cons, so you can decide if this type of term life insurance is right for your needs.
Term life insurance allows you to protect your loved ones from financial hardships that may arise following your death if it occurs during a specific time period (called the term). If you're young and in good health, you may wonder if it's worth it to take out a term life insurance policy. After all, if you outlive the term, you'll have nothing to show for the premiums that you paid. Return of premium (ROP) life insurance helps to address this problem and may make a term life policy more appealing.
What Is Return of Premium Life Insurance?
Return of premium life insurance is a type of term life insurance policy. Like other term insurance, it promises to pay a death benefit if you die before the end of a specified term. If you don't die, the insurance company refunds all the premiums that you paid. You receive the money as a lump sum, and you can then use it to cover expenses or put toward a new life insurance policy.
What Are the Benefits of Return of Premium Life Insurance?
The main benefits of ROP life insurance are:
- Retention of premiums. The biggest benefit of ROP insurance is that you can get all the money that you invested in life insurance back if you outlive your policy.
- Tax protection. The IRS usually views the returned premiums as a refund rather than income, so you likely won't have to claim it on your taxes.
- Conversion. Depending on the type of ROP policy you buy, you may be able to use the returned premiums to buy a whole life insurance policy at the end of the term. With this type of conversion, you may qualify for permanent life insurance without having to undergo a medical exam.
What Are the Drawbacks of Return of Premium Life Insurance?
- Increased cost. Normally, return of premium coverage is added as a rider to a term life insurance policy. You pay an additional fee on top of the premium for the benefit. Even if you purchase a term life policy that has return of premium as a standard feature, you'll pay more for your monthly premium than you would with conventional term life insurance.
- No interest earned. When you receive a refund from an ROP policy, you simply get back what you paid in. The money doesn't earn any interest. As a result, the buying power of the premiums may be reduced because of inflation.
- Less flexibility. With return of premium life insurance, you may have to purchase a policy with a higher death benefit than what you need because many insurers impose a minimum coverage amount. You may also have to choose a life insurance policy with a longer term than what you would buy otherwise.
- Less stability. Like all term life insurance, ROP policies expire. If you want to continue having life insurance coverage, you'll need to purchase a new policy. The premium amounts may be larger due to changes in the market, your increase in age and changes in your health. You may also need to undergo a medical exam to get a new term life plan.
Do I Get Money Back if I Cancel My Life Insurance?
Whether you get money back when you cancel your life insurance depends on what type of insurance you have.
- With any term life insurance, you won't receive any money if you cancel your policy outside of the free look period. You'll lose the death benefit and forfeit all premiums paid.
- With return of premium life insurance, the conventional term life insurance rules apply. You won't get a refund of your premiums if you end the policy early.
- With whole life insurance, you can receive the cash surrender value of your policy if you cancel. Life insurers determine this figure by subtracting fees from the cash value.
Can I Cancel Life Insurance at Any Time?
Yes, you can cancel your life insurance policy at any time. However, what happens when you cancel depends on the type of insurance that you have and the length of time that your policy has been in effect.
Free Look Period
By law, all life insurance policies must have a free look period that allows you to review your coverage. The period generally lasts for at least 10 days from the date your policy goes into effect. If you cancel during the free look period, the life insurance company must refund any premiums that you've paid. Your life insurance disclosures will include information about the length of the free look period.
Term Life Insurance
After the free look period, you can cancel a term life insurance policy at any time, but you'll usually lose all premiums paid. This rule applies to nearly all term policies, including return of premium life insurance.
Whole Life Insurance
The first few years of a whole life insurance policy are called the surrender period. During this period, the surrender value of a whole life policy is greatly limited. The insurer may not give you anything if you cancel your policy, or they may charge steep fees and provide only a small payout.
Each year, the surrender fee of a whole life insurance policy usually goes down. The longer your whole life insurance policy remains in effect, the less you'll have to pay the insurer if you cancel. Your policy documents will spell out how long the surrender period is and how surrender fees change over time.