Return of Premium (ROP) Term
This is a new kind of policy that offers a return of the premiums you have paid for the Term Life coverage at the end of the Term you selected (for example, 15, 20 or 30 years), if your policy is still in force.* This is more expensive than Level Term Insurance, but less expensive than Whole Life Iinsurance
For those that are not familiar, the return of premium rider allows the policy holder to get a full refund of all the premiums paid at the end of the contract.
20 year ROP Term vs. 20 year Regular Term Insurance
To illustrate the cost difference between purchasing regular term insurance vs. one with ROP ride, here are some quotes that I ran. In our scenario, I am using a 40 year old male, assuming he is not in excellent health, but is considered a Standard Non-Smoker. We are going to quote a 20 year term life policy with a $500,000 face value. Without the ROP, the annual premium will cost approximately, $720 per year for a total of $14,400 premiums paid over the 20 year period. Buying the ROP policy, the premium jumps to $1,945 per year, for a total outlay of $39,900, but if you don’t die, you get all the premium back at the end of 20 years.
Invest the Difference
Since I’m a firm believer of long term investing, my initial argument would say, go without the ROP policy and invest the difference. Let’s see how my theory holds up. If we take the difference of $1,225 per year and invest it over the 20 year period, I would have to earn 4.22% after tax to save up the total $39,900 in 20 years
If we compare 30 year plans on the same age 40 individual, we find Hartford Life with the lowest cost 30 year term at $1,195. Cincinnati Life’s 30 year term with ROP would cost $2,150 per year. If you invest the $955 annual difference in an outside investment, you would have to get a 4.82% after tax return to save up the same $64,500 that would be given back to you if you are living after 30 years. Not a bad supplemental retirement sum returned tax free for a 40 year old who believes they will live past age 70.
In closing, Return of Premium plans are worth evaluating, especially if you do not have risky hobbies, and have family longevity. Of course, every person’s situation is different, so let us provide a comparison specifically designed for you.