What is a return of premium rider

Return of premium (ROP) is a type of life insurance policy that returns the premiums paid for coverage if the insured party survives the policy's term, or includes a portion of the premiums paid to the beneficiary upon the death of the insured.[1] For example, a $1,000,000 policy bought for $10,000 a year over a 30-year period would result in $300,000 being refunded to the surviving policyholder at the end of the 30 years.

Tax implications

"Return of premium" is a perhaps intentional renaming/misnaming of the Internal Revenue Code provision for non-taxation of "return of principal", as returns of principal are not taxed, because these were your principal in the first place.

On one's 1040 for the tax year in which a "return of premium"/"return of principal" occurred, the amount on the 1099 would be shown on a line item basis as an income and again as a deduction, stating "ROP" or "Return of principal" on the itemized deduction, for a net income of zero.

Use as an investment

If a return of premium policy is viewed as an investment, rates of return are calculated based on the incremental cost above the cost of regular term insurance. A sampling of policies found returns in the range of 2.5 to 9 percent.[1]

Critics point to the rate of return being less than in a typical investment, obviously before the insured's death, the extra cost of the policy compared to basic term life insurance policies and that, if the policy is canceled at any time, no money is refunded.

Many term life policies do allow prorated refunds at some point during the life of the policy, during the insured's lifetime, although such refund is usually "short rated", that is, it is significantly less than the imputed value of the refund if calculated using conventional tables, using the rate of return specified in the insurance contract. In some instances, where a contracted rate of return was 5.0 percent, the "short rate" proved to be 3.5 percent, but this fact was seldom, if ever, disclosed to the insured during the agent's "sales pitch".

Use in divorce

A return of premium policy might be used after a divorce in which the divorce decree either requires each spouse to purchase life insurance on the other spouse or for the spouse that is paying for alimony or child support to buy life insurance on themselves for a period of time to compensate the surviving party for the loss of alimony or child support.

When a party who is covered by any life insurance policy lives past the term of the insurance, the premiums paid for the traditional term policy are considered spent money for the "risk" that never occurred. By using a return of premium term life insurance policy, the insurance company would return all premiums to the party who paid for the policy. This is considered a reimbursed expense and is not taxable in the United States.

References

1. ^ a b Wiener, Leonard (17 October 2004). "Getting a payback : Return-of-premium term life insurance policies reward you for staying alive". usnews.com. U.S. News & World Report. Retrieved May 21, 2011.

Retrieved from "//en.wikipedia.org/w/index.php?title=Return_of_premium_life_insurance&oldid=1109125548"

An insurance policy generally isn’t something you can return for your money back. But there’s one exception: return-of-premium life insurance.

Also known as ROP life insurance, this type of coverage reimburses you for the money you paid in premiums if you don’t die during the term. Some insurers offer it as a stand-alone policy, though it’s most commonly sold as a rider that can be added on to a life insurance policy.

This list focuses on return-of-premium policies that are sold separately. To narrow down the list, we looked at coverage amounts, term lengths and state availability, as well as insurers’ financial strength and reputation among customers.

All of the companies listed below scored at least 3 out of 5 stars. While return-of-premium is an uncommon product, it’s a good idea to compare life insurance quotes from at least two companies before making a decision.

NerdWallet’s life insurance ratings are based on consumer experience, complaint index scores from the National Association of Insurance Commissioners for individual life insurance and weighted averages of financial strength ratings, which indicate a company’s ability to pay future claims. Within the consumer experience category, we consider ease of communication and website transparency, which looks at the depth of policy details available online. To calculate each insurer’s rating, we adjusted the scores to a curved 5-point scale.

These ratings are a guide, but we encourage you to shop around and compare several insurance quotes to find the best rate for you. NerdWallet does not receive compensation for any reviews. Read our editorial guidelines.

Learn more about our top ROP life insurance companies in August 2022 by reading the summaries below and checking out our comprehensive reviews.

4.5

Policy name: Return of Premium Term Life.

Coverage amount: $100,000 to a variable limit.

Term lengths: 20 or 30 years.

Pros: State Farm ranked No. 1 for customer satisfaction in J.D. Power’s 2021 U.S. Individual Life Insurance Study.

Cons: Not available in Massachusetts.

Open to those from 18 to 60 years old, State Farm’s return-of-premium life insurance policy offers coverage starting at $100,000. Depending on your age, you can buy a policy lasting 20 or 30 years. If you’d like to convert your policy to permanent life insurance, you can do so before you turn 75.

State Farm allows you to add children’s term life insurance to your policy, as well as a waiver of premium rider, which pauses your premiums if you become disabled and can’t work for a period of time. If you have a State Farm auto insurance policy, purchasing a ROP policy with the company may earn you a discount on your car insurance premiums.

Read the full review: State Farm life insurance

4.0

Policy name: Termsetter ROP.

Coverage amount: $25,000 to a flexible limit.

Term lengths: 20, 25 or 30 years.

Pros: Applicants can contact their life insurance underwriter directly.

Cons: Not available in New York.

Available in 20-, 25- and 30-year terms, Cincinnati Life’s Termsetter ROP policy can be customized with multiple life insurance riders. These include an accelerated death benefit rider that allows you to tap into your policy’s payout while you’re still alive if you’re diagnosed with a terminal illness. You can convert all or part of your coverage to permanent life insurance after your 70th birthday. The insurer doesn’t list a maximum coverage level; rather, the amount of coverage you can buy depends on your age and the reason for purchasing a policy.

Cincinnati Life stands out for giving applicants access to their underwriter via phone or email, which is a rare offering. Typically, underwriters work behind the scenes and don’t communicate with customers directly, so this access is helpful if you have questions after you’ve submitted your application. Some ROP applicants are eligible for accelerated underwriting, and the insurer is lenient toward non-cigarette tobacco users when it comes to setting rates.

» MORE: Life insurance for smokers — and quitters

3.0

Policy name: Path Protector Plus Return of Premium Term Life Insurance.

Coverage amount: $50,000 to $500,000.

Term lengths: 20 or 30 years, or to age 65.

Illinois Mutual’s return-of-premium policy is straightforward. If you’re 18 to 60 years old, you can buy up to $500,000 in coverage, and add an accelerated death benefit rider to your policy.

It’s quick and seamless to get a quote online, and agents are available for follow-up questions.

These companies allow you to add a return-of-premium rider to specific policies. You can expect to pay higher premiums if you opt in to this coverage.

Company and NerdWallet rating

Policies eligible for ROP rider

When you buy a stand-alone return-of-premium life insurance policy, you’ll select a term length, such as 20 or 30 years. If you die during that time, your life insurance beneficiaries receive the death benefit. But if you don’t, you’ll get a refund of the premiums you paid, without interest — though your insurer might subtract the cost of administrative fees and similar charges. The money you get back isn't taxable, as it’s simply a refund of the payments you made.

To compare, with regular term life insurance, you won’t receive any money if you’re still alive when the policy expires.

ROP life insurance is an interesting product because it’s a term life policy, but it builds cash value over time. Once you’ve accumulated enough cash value, you can borrow against your policy, withdraw the money or surrender the policy for cash if you no longer need coverage.

The money-back feature comes with a higher price tag. Let’s say you’re a healthy 40-year-old looking to buy a 20-year, $500,000 policy. You can expect to pay nearly five times as much for a return-of-premium policy compared with a standard term life insurance policy without ROP benefits.

These are sample rates for a 20-year, $500,000 return-of-premium life insurance policy for super preferred applicants. These are nonsmokers in excellent health.

It depends on your budget and how you’re fitting life insurance into your overall financial plan.

For most people, a standard term life insurance policy is sufficient. With this approach, you could put the money you don’t spend on a return-of-premium benefit aside into a high-interest savings account, or invest it. If you don’t spend the money and simply let it grow, you’ll likely end up with more money at the end of your policy’s term due to the interest you earn.

If you’re not comfortable with the idea of paying into a life insurance policy that may expire and you can afford the pricey premiums, consider ROP. Just be sure to pay your premiums on time and avoid canceling your policy, as you might not get your money back.

» MORE: Average life insurance rates for 2022

NerdWallet examined complaints received by state insurance regulators and reported to the National Association of Insurance Commissioners in 2018-2020. To assess how insurers compare to one another, the NAIC calculates a complaint index each year for each subsidiary, measuring its share of total complaints relative to its size, or share of total premiums in the industry. To evaluate a company’s complaint history, NerdWallet calculated a similar index for each insurer, weighted by market shares of each subsidiary, over the three-year period. NerdWallet conducts its data analysis and reaches conclusions independently and without the endorsement of the NAIC. Ratios are determined separately for auto, home (including renters and condo) and life insurance.