Return of Premium Life Insurance

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Younger people sometimes think life insurance, especially term life insurance, is a waste of money since they often outlive the policy. But everyone who has dependents, spouses/partners, or families who may not be able to pay for funeral and burial arrangements, etc., should ensure that their beneficiaries would be financially secure without them. Return-of-premium (ROP) life insurance serves as a creative alternative for some. It offers good coverage and an investment for less money than whole life insurance.

A term life insurance policy takes its name from the fact that it covers a specific period (term) of time. The average is 20 years, although the term can be shorter or longer. The premiums cost less than whole life or similar policies, but once the term expires, both the payments and the face value are inaccessible. Buying a ROP policy is a way to redeem the monthly premiums. That means when the term expires and the insured is still alive, he or she will get a check for all the money they've paid for the policy.

At first glance, this sounds like an excellent way to invest money for the future, but before buying one of these policies, be sure to do the math and compare what various companies offer.

One important point is that this plan costs more than regular term life insurance. Actual figures vary by company and can equal as much as 30 to 50 percent more. It may make more sense to pay for a regular term life insurance policy and invest the difference on your own. One appealing aspect of the ROP option, however, is that it forces the insured to pay the premiums, as any lapse will cancel the policy and the policyholder's chance to get their money back. It may be appropriate for those who lack self-discipline when it comes to budgeting and investing.

Another positive aspect of ROP insurance is that it encourages policyholders to keep the policy for the entire term. This benefits them because they receive payment for staying alive. It benefits the carrier as well because it lowers the drop-out rate for term insurance holders. Policyholders often stop paying on their term policies when they encounter financial hurdles, thus losing their safety net if they do die young. Also, if they keep the policy long term, their premium return is considered a refund of payments and therefore not taxable.