Since term life insurance policies accrue no cash value, most policyholders see no return on their investment unless they pass away during the policy’s term and a death benefit is paid to their beneficiaries. This is true of any insurance policy—if your home never burns to the ground or your car accident history is squeaky clean, you’ll never see one dollar from your homeowners’ or car insurance.
Wouldn’t it be nice if your term insurance policy could act like a piggy bank for you—storing your premiums up for a full refund should you outlive the policy? Believe it or not, with the right rider added to your policy, it can. Unlike other types of insurance, many term life policies offer a return of premium (ROP) rider that guarantees a return of the premiums paid if you outlive the policy.
Your premiums will increase when an ROP rider is added to your policy. When determining whether the ROP rider is in your best interests, consider whether the funds paid for the rider would be better invested elsewhere.
An example is a ten-year term life insurance policy with a premium of $600 per year. If the ROP rider adds $300 per year, you will pay $900 or $9,000 over the policy’s life. At the end of that ten-year term, you will receive the entire $9,000 back from the insurance company.
Without Return of Premium Rider
Otherwise, without the ROP rider, you’d have an extra $300 per year to invest—but you would need to earn more than 16% per year to accumulate $9,000 after ten years. In addition, refunds received under the ROP rider are tax-free, while you’ll pay income taxes on interest earned in your savings account.
You must meet certain conditions to receive the return of the premium guaranteed by the rider. Suppose you forget to make a premium payment or allow your policy to lapse. In that case, you may no longer be eligible for the total premium payout of your policy, so it is essential to keep the policy in force, or you will be wasting the extra premium dollars you send to the insurance company.