Return of premium (ROP) life insurance is a relatively newer type of term insurance policy and is very similar to level term life. It offers a guaranteed amount of life insurance at a premium rate that is fixed for the entire level term period. The major difference with ROP term is that at the end of the level term period, return of premium term insurance refunds 100% of all premiums paid. Yes, ROP term insurance provides relatively inexpensive life insurance protection with a completely guaranteed money back feature!
How Does ROP Insurance Work?
As you might imagine, return of premium term insurance is priced higher than level term insurance. With ROP term, the time of value of money principal applies. The insurance company charges a higher rate for the life insurance protection so that it can utilize the excess premiums to invest and hopefully earn a rate of return that exceeds the total premium payments over the term period. To see the actual cost difference between ordinary term life and ROP term see, “Compare Level Term and Return of Premium Term Life.”
Because time is required for the insurance company to earn a satisfactory return on investment, most ROP term policies have a minimum level period of 15 years. However, the most popular ROP polices are offered over 20 or 30 year periods. The reason is simple, the longer the level term period, the more time the insurance company has to invest the premiums and earn a return. Therefore, 15-year ROP term policies are usually very expensive compared to the 20-year ROP and 30-year ROP term options.
Return of Premium Term Builds Cash Value
In addition to providing a return of premium option at the end of the term period, most ROP term policies build a cash value beginning at the end of the 5th policy year. Policy cash value continues to increase on a percentage basis each year until the end of the level term period. For a specific example of the cash growth of a ROP policy see, ROP cash surrender schedule.
Like most whole life and universal life policies, ROP cash values can be borrowed in the form of a policy loan. If cash is borrowed from the policy, interest will accrue on the outstanding loan balance. Any outstanding loan will be subtracted from the insurance proceeds payable to the beneficiary at the insured’s death.
ROP Term: Renewable and Convertible
ROP term insurance is usually renewable beyond the level term period but like level term, the premiums will increase significantly. Depending on the insurance company, at the end of the level term period, you may have the option to use the policy cash value to purchase a guaranteed paid-up “whole life policy” without having to prove your health. Obviously, at the end of the level term period, you also have the option to walk away with all of your premium payments.
Most return of premium policies also offer a conversion privilege or conversion feature. This option allows you to exchange your ROP term policy for a more permanent or longer guaranteed policy without proof of health. The conversion privilege is ultimately valuable in situations where you may have had a health change and are no longer insurable. All other factors being equal, the longer the conversion period, the more attractive the policy.
Return of Premium Policy Riders
Additionally, most companies that underwrite ROP term policies offer policy riders such as accidental death and dismemberment (AD & D), children’s term insurance, and waiver of disability and accelerated death benefits. These riders allow you to add more comprehensive policy benefits for a small extra premium. For more detailed information on policy riders see, “Life Insurance Riders Defined” .
Uses for ROP Term Life
Return of premium term is useful when the need for life insurance is temporary and you are interested in paying a little more money to get all or a portion of your cash back when the insurance is no longer necessary. Many people do not like the idea of paying for term insurance which builds no equity and only pays a benefit if you die. ROP term insurance, also known as “cash value term”, is ideal in these situations as the cost is significantly lower than whole life insurance but still offers a 100% return of premium at the end of the level term period. For additional uses for ROP term see, “Why Buy Return of Premium Term Life Insurance.”
Return of premium term provides a guaranteed amount of life insurance at a premium rate that is level over the term period but also builds cash value and returns 100% of premiums paid at the end of the level term. It is a great combination of relatively inexpensive life insurance protection with a completely guaranteed return of premium feature. If you are considering a ROP term policy, call MEG Financial today toll free at (877) 583-3955. We represent the most competitive ROP term insurance providers in the market and will be happy to provide you with a personalized rate comparison or answer any ROP questions.