Term-life doesn’t offer the investment features of other types of life insurance, but under a return-of-premium (ROP) policy, you’re able to invest in something unique: yourself.
The policy’s design is fairly straightforward. According to the LIFE Foundation, if you keep a policy in force for its entire term, your insurance company returns all of your premium payments from that period to you once the term ends.
Of course there is always a catch. The premiums you have to pay under this policy are much more expensive than standard term life insurance premiums. In some cases, this means 20 to 30 percent more expensive.
Return of premium policies are popular with those looking for term insurance but desire to get their paid premiums back, explains David Theile, Director in Life/Health Product Management at State Farm.
“The importance of getting paid premiums back is what determines the worth of the extra cost,” said Theile.
Thiele says to determine the value of a ROP policy, it’s best to compare the difference between the ROP premium, regular term premiums, and the after-tax interest rate that would be required to accumulate the amount of benefit that would be returned to you at the end of the term.
The current state of the economy has forced life insurance companies to raise the cost on life insurance policies that offer an ROP rider. The Society of Actuaries newsletter discusses the reasons behind recent ROP product changes.
Remember, with everyone living a lot longer these days, term insurance rates have dropped. If you own a standard term policy, you can always drop it in favor of a cheaper policy or convert it into a whole life insurance policy.
However, if you own a return-of-premium policy and cancel it before its term expires, you’ll have paid a much higher cost in premium for life insurance without the advantage of getting a full refund.