Return on Premium (ROP) Life Insurance

Return of premium life insurance is a type of term life insurance that not only provides a death benefit, but features the return of the money paid as premiums when the term expires. This type of term life insurance product is particularly appealing to people who want to be covered by a life insurance policy but hate the idea that they make annual premium payments which are of no benefit unless they die. While permanent life insurance such as a whole life policy offers some additional value for the annual premiums, it can be considerably more expensive than return of premium life insurance, and many people like to have more control over their investments than is allowed with permanent life insurance.

Return of premium life insurance works in a manner that is very similar to a standard term life insurance product: you select the term for which you would like to be covered, you select the amount of death benefit you want your beneficiaries to receive if something should happen to you, and then you make annual premium payments for the length of time that the term lasts. Where return of premium life insurance is different from standard term insurance is when the term is over; with return of premium life insurance, the amount of money you paid in premiums is returned to you in cash.

Some return of premium life insurance policies allow for a partial return of premiums paid if you were to cancel the policy before the full term was over. In these types of insurance products, the closer you are to the end of the term when you cancel, the more of the accumulated premiums are returned to you.

For IRS purposes, the money you receive at the end of the term of a return of premium life insurance policy is considered tax free, since you are essentially receiving back the after-tax money you already paid for the annual premiums.

The greatest downside associated with return of premium life insurance is that the premiums are substantially higher than the premiums you would pay for a standard term life insurance policy. To determine if return of premium life insurance is the best choice, you need to weigh the difference you will pay in premiums, the amount of money you will receive at the end of the term, and the returns you could earn through investing the difference in premiums in some other investment vehicle.