Since Term Life insurance policies accrue no cash value, most policyholders see no return on their investment unless they pass away during the policy’s term and a death benefit is paid out to their beneficiaries. This is true of any insurance policy — if your home never burns to the ground or your car accident history is squeaky clean, you’ll never see one dollar from your Homeowners or Auto insurance.
Wouldn’t it be nice if your Term insurance policy could act like a piggy bank for you — storing your premiums up for a full refund should you outlive the policy? Believe it or not, with the right rider added to your policy, it can. Unlike other types of insurance, many Term Life policies offer a return of premium (ROP) rider that guarantees a return of the premiums paid if you outlive the policy.
When a ROP rider is added to your policy, your premiums will increase. When determining whether the ROP rider is in your best interests, you must consider whether the funds paid for the rider would be better invested elsewhere.
As an example consider a 10-year Term Life insurance policy with a premium of $600 per year. If the ROP rider adds an additional $300 per year, you will pay $900 per year or a total of $9,000 over the life of the policy. At the end of that 10-year term, you will receive the entire $9,000 back from the insurance company.
Otherwise, without the ROP rider, you’d have an extra $300 per year to invest — but you would need to earn greater than 16% per year to accumulate $9,000 after 10 years. In addition, refunds received under the ROP rider are tax-free, while you’ll pay income taxes on interest earned in your savings account.
There are certain conditions you must meet to receive the return of premium guaranteed by the rider. If you forget to make a premium payment or allow your policy to lapse, you might no longer be eligible for the full premium payout of your policy, so it is important to keep the policy in force or you will be wasting the extra premium dollars you send to the insurance company.