Does it Makes Sense to Purchase ROP Term Life Insurance?

John Stokes, a young assistant manager of a department store in Tulsa, OK, was inquiring about term life insurance plans. He was concerned about making his family financially secure in case he met an untimely death. For him and other people in a similar situation it makes sense to enroll in term coverage. But this guy in particular had a unique requirement; he wanted ROP term life insurance.

For people who are not familiar with it, ROP stands for return of premium rider in which all the premiums paid by the policy holder are returned after the end of the contract. At  first it sounds like an interesting deal.

The most prominent complaint people have with life coverage is if they survive the term of the policy, all the money paid in by them belongs to the insurance provider. People who have this issue should purchase ROP term life insurance.

Cost of an ROP Rider

At first glance, the ROP rider looks pretty simple. But just like any other feature, this rider comes at a price. There is an increase in premiums by 20% – 40% when term coverage comes with this rider. Moreover, the insured person is required to keep the policy for the entire contract period in order to get the full refund of premium.

So the big question is, does it really make any sense to pay extra for the rider. Let us dig a bit deeper…

Regular vs. ROP Term Life Insurance

Here is a look at some of the examples to find out if there is any cost difference between the regular vs. ROP rider. We’ll take the scenario of a 30 year old male, in excellent health. He wants to purchase 30 year term with a face value of $1,000,000. For a regular policy the premium will come up to around $720 for a year, which means the person pays $21,600 in 30 years.

If this coverage is purchased with an ROP rider, the premium will go up to $1,180 for a year, which costs $35,400 in thirty years, which comes up to around a 63% difference between the two type of plans.

Invest the Difference

According to insurance experts, people who are looking for long term investment should go without ROP term life insurance and invest the difference elsewhere. Let us take an example to better understand this. We invest the difference of $460 from the example and invest it where we get 6% return for a period of 30 years.

In thirty years’ time, the person will have accumulated $33,366. Deduct $21,600 for the premium paid by you in that period and the result is $14,766.  Purchasing ROP term life insurance does make sense. Let us consider the same scenario with an average of 8% return.

With an eight percent return we can accumulate $52,110 and after deducting the the premium paid by us, what’s left is $30,500. If we purchase the policy with an ROP rider we will get back $33,500, which still leaves us in red. If we calculate it again with a 10% return than we get closer, but getting such a high return rate is close to impossible.

Some More Things to Consider

As we look at the example, we can see that we have made some noticeable conclusions:

  • That the individual is able to pay high premium.
  • The individual keeps the policy current for the entire duration of 30 years.
  • The insurance cost remains stagnant.

These variables can make a huge difference in the ultimate outcome of any policy. So here we cannot say for sure that purchasing ROP term life insurance will be the most sensible decision.

Usually, one should not have the ROP feature on a long term policy. It makes sense to have this rider in policies that are from ten to fifteen years. Typically such plans are purchased by business partners where every partner purchases coverage on each other’s life. ROP term life insurance makes economic sense when it is purchased for shorter time.