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Term Life Insurance Return of Premium Rider: Pros and Cons

By Tes Kurtz on January 9th, 2010

Term life insurance is known as the cheapest insurance coverage available--allowing policyholders to get the most life insurance coverage for their premium dollars. This is because term life insurance has a calculated risk, and you are only charged for the cost of insurance coverage.

Although term life insurance is affordable, this type of life insurance does not provide a return on investment. However, in recent years, a new add-on feature called return of premium (ROP) has been made available to change this. With ROP, if you outlive your term life insurance, you get your money back.

Depending on your financial needs and goals, ROP can be a great add-on to your term life policy. However, there are both advantages and disadvantages to this particular term life rider.

The Birth of the Return of Premium Rider

With a traditional term life insurance policy, if you outlive your policy, you do not receive a refund for the premiums paid. Some term life insurance consumers wanted an opportunity to have their insurance payments returned. Thus, insurers developed the ROP rider.

What Is the Return of Premium Rider?

A rider is an attachment to your life insurance policy that can alter the terms or coverage for your policy. If you outlive your term life insurance policy, and do not allow the policy to lapse, the ROP rider alters the policy terms to provide a refund for all or some of the paid premiums at the end of your term.

The parameters of the ROP rider differ from policy to policy. ROP might be a provision within a term life policy, or it can be a rider added to a term policy for an additional cost.

Return of Premium: Advantages

You might be hesitant to purchase life insurance because you believe that you are more than likely to outlive your policy. If this is the case, the possibility of receiving a refund from your term life insurer may sound like a pretty good deal.

ROP might be thought of as a safety net for your safety net. If you pass away, your beneficiaries receive a lump sum death benefit. If you outlive the term policy, the insurance company returns all or some of your premium payments.

Return of Premium: Drawbacks

The biggest drawback of the ROP rider is the cost. With an obligation to pay you back at the end of your policy term, insurance companies charge higher premiums for this feature. A term policy with the ROP add-on feature can cost 25%-50% more than standard term life insurance.

Additionally, you must hold on to your policy for the full term of the policy to receive the refund. A lapse in your insurance policy occurs when you are unable to make your premium payment within the policy grace period, and as a result, your policy is terminated. If you allow your policy to lapse, you may receive only a partial refund, or no refund at all.

Also, if pass away, your beneficiaries are still paid the policy's face value--just like a standard term life insurance policy--but with the ROP rider your have paid higher premiums for the same death benefit.

It should be noted that many insurers offer a pro-rated return if you hold on to your policy for a few years. Also, some policies return the base premium, but not the extra return benefit premium--others return both.

Decision Factor

Term life insurance with the added ROP feature is not intended as an investment. If you are looking for a life insurance policy that provides an investment element, you might consider whole life insurance.

Although the ROP rider has both advantages and disadvantages, the rider can be beneficial. Life insurance coverage is important, especially if you have dependents. If the ROP rider makes you more comfortable with term insurance, the higher premiums may be worth the money.

If you are considering a ROP rider for your term life insurance policy, compare quotes from multiple insurance companies. Just enter your zip code to get started.

Source :
Leonard Wiener • Getting a payback: Return-of-premium term life insurance policies reward you for staying alive • Oct 17, 2004 • US News • http://www.usnews.com/usnews/biztech/articles/041025/25insurance.htm

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