For most people, in most situations, term life insurance versus whole life insurance is a better choice and a better value. It provides financial security for your beneficiaries in the event you die during the term of the policy. But term life insurance versus whole life insurance is akin to an expense versus an investment since the premiums you pay have no cash value and never accrue interest. Recently, however, insurance companies have developed a product that combines some of the investment features of a whole life insurance policy with the relative affordability and flexibility of term life. It’s called Return on Premium term life insurance (or ROP). Typically, it is sold as a rider (an add-on) to a traditional term life policy.
Just as you would with a traditional term life insurance policy, with return on premium term life you select your preferred coverage period -- typically 10, 20 or 30 years. Depending on your age and other considerations, your premiums can be anywhere from 20% to 50% more than a comparable term life policy, but still significantly less than whole life. And like they are with traditional term life insurance coverage, your premiums and death benefits will be fixed for the term of the policy. The difference is that your insurance provider will be investing a portion of your premiums and, if you live to the end of your term, you’ll get your money back tax-free (up to 100%, depending on your policy). That’s the upside.
One downside of return on premium term life is right there in its name. It is not a return on investment. You get back only what you paid in, and it won’t be adjusted for inflation. In essence, you’re giving the insurance provider an interest-free loan. Still, if you have to have life insurance, anyway, and you can’t afford whole life coverage, an ROP rider may be a good option.
Another downside of return on premium term life insurance is that you stand to lose up to 100% of what you paid in if you cancel the policy before the end of the term. Depending on your policy, there may be a sliding scale of partial payback for surrendering early, say up to 35% after 20 years. Some companies do offer two tiers of return on premium coverage: basic, with lower premiums and correspondingly lower payback if you back out early; and enhanced, with a higher partial payback for early cancellation.
Unless you’re committed to staying in it to the end, paying extra for any return on premium policy doesn’t make financial sense at all.
If this life insurance option sounds right for you, shop for return on premium term life insurance quotes to find the best price for your situation.