A 'return of premium' rider offers a refund if you outlive your term life insurance policy, but it will cost you extra

  • Return of premium is an optional add-on feature for term life insurance policies.
  • If you outlive your term life insurance policy, return of premium offers some or all of your money back.
  • This feature will increase your monthly or annual insurance premium.
  • Policygenius can help you compare life insurance policies to find the right coverage for you, at the right price »

Life insurance is a contract between you and the life insurance company. You pay premiums (monthly or annually) for a payout, known as the death benefit, that your living relatives will receive after you die.

There are two main types of life insurance policies to choose from: permanent life and term life. Return of premium is an optional add-on rider for term life insurance policies. 

What is return of premium life insurance?

It is important to understand that return of premium, also referred to as ROP, is an optional add-on rider to a term life insurance policy. A rider is an amendment to the original policy that usually comes at an additional cost.

Unlike permanent life insurance that never expires, term life insurance has a timeframe — five, 10, 20, or 30 years. If you outlive your term life policy, then you must reapply for coverage.

For most types of term life insurance, if you haven't had a claim under the policy by the time it expires, you get no refund. But some insurers created term life insurance policies with a "return of premium" feature that returns part or all of the money you've already paid if you haven't used the policy once your term ends. 

 Term life insuranceReturn of premium rider*Permanent life insurance
Cash valueNoYes Yes
Maturity daten/aEnd of term (10, 20, 30 years)Up to age 110 usually
Cash value at maturity daten/aEqual to premiums paidEqual to policy's death benefit
Surrender value$0Equals accumulated cash value**Equals accumulated cash value

*Not all return of premium riders offer a cash value component.

**Only applies to return of premium riders with a cash value component.

Data sourced from ValuePenguin

Because return of premium is an optional add-on rider, it increases the cost of your insurance premium. It may not be available for all types of term life insurance or with all insurance providers. Return of premium riders can be 130% more expensive than a regular term life policy, according to ValuePenguin. Talk to your insurance agent about whether your term life policy offers a return of premium and how much it would cost. 

Is return of premium life insurance worth it?

If you have a term life policy with return of premium, you will pay increased premiums, but you will get your premiums returned if you outlive the policy. The question to ask is what do you want from your life insurance policy: death benefits, to build wealth and a legacy while you're alive, or both?

Return of premium mimics some of the benefits of a permanent life insurance policy. State Farm notes that its return of premium offers cash value that you can borrow during the term, but any unpaid balances decrease the death benefit. Remember, term life insurance expires at the end of the 10-, 20-, or 30-year period. It is possible for you to outlive the term and owe money if you don't pay back loans taken against the return of premium cash value feature. 

If you want a policy that doesn't expire, accumulates cash value, and has a death benefit that you can increase over time, then maybe a permanent life insurance policy is what you're looking for. Also, if you decide to cancel or surrender your permanent life insurance policy, you get to keep the cash value that has been earning interest — you will pay taxes on it, though.

Mark Williams, CEO of Brokers International, told Insider it's good to have a combination of permanent and term life insurance. He noted if you have $200,000 in permanent life and $300,000 in term for 20 years, at the end of 20 years the term life insurance policy goes away but you'll have earned cash value on the $200,000 permanent policy that never expires.

Much depends on your financial situation, budget, and short and long-term goals. To make sure you're choosing the right life insurance policy for you, consult your insurance agent and financial planner. 

Ronda Lee is an associate editor for insurance at Personal Finance Insider covering life, auto, homeowners, and renters insurance for consumers. She is also a licensed attorney who practiced litigation and insurance defense.

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