Basics of Return of Premium on Term Life Insurance (ROP)

In traditional term life insurance plans, the investor pays guaranteed premiums for a period of 10,15,20 or 30 years depending upon the kind of policy drawn. The fixed rates do not change for the entire duration of the policy which makes term life insurance one of the cheapest insurance products available in the market. Once the policy has expired however, the investor is left with nothing.

Only in the event of the death of the policyholder while the plan is still active will the family of the deceased receive the proceeds from the plan. The funds from the policy can then be used to manage mortgage costs, child education expenses or other related costs. This gives the family enough time to arrange for an alternative source of income. For these reasons term life offers very good coverage in the form of protection for the family of the deceased.

Of course, some people are unhappy spending so much on a term life policy  for long periods of time with nothing to show in return when the plan expires. To counter this, insurance companies offer a return on premium term life policy where a part of the premium is returned at the end of the term (provided death benefits for the same plan were not paid out).  The policy holder pays substantially more in the form of premiums to entitle them to such returns.

How much does it cost?

Return of premium on term life insurance costs much more than standard term life insurance policies. The cost for ROP is higher when the time period of the plan is shorter. For instance the percentage of ROP would be higher for a 10 year plan than a 30 year plan. In a 30 year plan an ROP plan may cost 30-40% more than a general term life insurance package.  For a 10 year old ROP package the cost may be many times more than a standard term life product.

Is ROP for me?

Return of premium term life insurance is ideal for those people who like to see some form of return when they go in for a particular policy. A lot of people are unhappy when they receive no return for an insurance package into which they paid premiums for several years.  These people cant help but think that the money spent on a standard term life plan went to waste. An ROP offers peace of mind for people with such a perspective.

Is it possible to surrender my ROP plan?

Most companies rarely encourage their clients to surrender their ROP plans. While the possibility exists, there are consequences for withdrawal from the plan. Depending upon the contract drawn between you and the insurer, it is possible that you might not get all premiums that would be due to you at that specific point in time.

For example: If someone was to surrender their ROP mid way through the term, it would not mean that the investor is liable to get half the agreed amount of their premium as payment. It would be dependent on what the contract states, but normally the investor collects a higher percentage of their premium as they near the end of the term.

why going in for a return of premium term life insurance may not be a good idea

The premium rates for return on premium term life insurance are usually twice that than those of standard term life policies. And to that effect, the extra money that is paid by the holder of the policy – is the amount that is usually returned upon expiration of the policy. In addition to that the investor will not receive any extra benefits or coverage for the additional amount paid for the policy.

If you want to get returns on your insurance package you may be better off going in for an alternate insurance product that comes with genuine returns. On the other hand you could get twice as much as coverage from the amount you pay on a return of premium term insurance if you were to spend it on a normal term life insurance package.

The extra money you that you spend on return on premium term insurance can be invested in other business opportunities. There are quite a few reasons for this. Once the aforementioned policy expires, the holder does not receive any additional sum of money.  All the insurer does in this instance is collect the extra money paid by the holder and then give it back when the policy expires. Also your dependents stand to receive the same coverage payout regardless of whether the investor has bought a term life or return of premium on term life insurance package.

This is the biggest disadvantage of return of premium term life insurance. The investor does not receive any interest on the extra money invested. Instead the policy holder would  spend more through return on premium term policies, collectable only after the policy has expired. By then the value of that payout  would have depreciated considerably as it has not accrued interest. A simple savings account would suffice.

Get yourself more insurance for the same price

Rather than spending more money on return of premium on term life insurance, it makes better sense to extend the cover of your standard term life plan. This would enable you and your family to access more services as part of the plan. If  you feel your standard term life plan is already adequate then you could  invest in policies that would be of use when you near retirement.