A return of premium rider is a policy add-on that returns the premiums paid on the term life insurance policy if the policyholder outlives the term. This is a compelling proposition for many who cringe at the thought of paying for life insurance with the possibility of never getting a payout but the extra cost and lost investment opportunities mean that it may not work for you.
At first, life insurance seems to be a relatively straightforward financial asset. The initial costs and benefits of owning a life insurance policy ought to be immediately apparent. In exchange for a small amount of money paid each month (your monthly premiums), your loved ones will be able to receive a significantly larger amount of money once you have passed away. However, despite everything that may be obvious about owning life insurance, certain conditions and details can make the process much more complicated. There are such as a return of premium rider on a term life insurance policy, ought to be carefully examined before you make any financial commitments.
In this article, we will discuss everything you need know about the unique return of premium rider that many life insurance companies currently offer their clients. By taking the time to understand this unique policy add-on, and also understand any other “riders” that your life insurance provider may be offering, you will be in the ideal position to create the type of policy that can effectively address your current financial needs. Ultimately, some people will decide to add a return of premium rider to their policy and others will decide they are better off investing their money elsewhere.
To understand whether a return of premium rider makes sense for your financial situation, the first thing you will need to know is recognize the difference between term and permanent life insurance policies. As the name might imply, a permanent life insurance policy will last for your entire life. These policies are usually more expensive and may feature certain additional benefits such as an attachable cash value.
Term life insurance policies, on the other hand, are usually much more affordable and easier to apply for (with some exceptions). With a term life insurance policy, your coverage will only last a specific amount of time. Typically, this “term” will last 10, 20, or 30 years, though there are other options available on the market as well. Once the term is up, your policy will “expire” unless you decide to renew or extend it. However, there may be some options such as a ‘return of premium rider’ that will give you a greater amount of financial flexibility at the end of your term.
Once your term life insurance has expired, despite the financial protection you received while the policy was in place, you may feel as if your investment was a “waste” if you are still alive. Though this line of thinking is fundamentally flawed. After all, you probably wouldn’t regret purchasing car insurance even if you never get into an accident right?
Fortunately, a return of premium rider makes it possible for some of the money you committed to the life insurance company over the course of your policy to be returned directly back to you.
A life insurance “rider” is a term that is used to describe any additional benefits that can be added to a standard life insurance policy. Return of premium riders can be built into some term life insurance policies to create a situation where if you were to outlive the length of your term, then the premiums (or a portion of your premiums) will be given back to you once the policy has expired.
Naturally, because the life insurance company stands to risk losing money whether you survive the policy or not, adding a return of premium rider to a life insurance policy will increase the amount you are expected to pay each month. The exact increase in the cost of rider will depend on a wide array of variables:
Because there are so many different factors involved, you will certainly have a lot to be thinking about.
Typically, you can expect that a return of premium (ROP) rider will increase by about 30%, but as stated, this figure will vary tremendously between policies. Because the presence of the rider changes the amount you are paying each month, the rider itself should not be considered “risk-free.”
Additionally, another thing you should consider is that if you are willing to be active with the way you allocate your financial resources, you may be able to earn more by taking 30% of your otherwise life insurance policy and investing in elsewhere. This, of course, will depend on where you decide to invest and how these investments perform. Many people prefer to invest in a return of premium rider because it is much more straightforward than the other available options. Furthermore, as long as they are able to outlive their policy, the return on their investment will be guaranteed (contrary to, say, the stock market).
Life insurance is unique in the sense that while the policy has characteristics similar to other types of insurance—car insurance, home owner’s insurance, etc.—it is also characteristically identical to other assets you may find in a financial portfolio. Because of this, you should consider both the security components as well as the wealth management components of a return of premium rider before you make any real commitments. The art of creating a quality life insurance is balancing the costs and benefits of your available options in a way that effectively addresses your needs.
Though the term “customization” is most often associated with permanent policies in the life insurance industry, as you can tell from your understanding of the return of premium option, there are still many different things that you can do to customize a term life insurance policy as well. Term life insurance is usually considered to be rather straightforward, but the difference between “good” policy and a “bad” policy can have a tremendous impact on your financial well-being over time.
As suggested, your choice in a life insurance policy (as well as your choice to purchase any additional riders) is very personal. This means that you should consider the dynamics of each prospective policy as well as your personal situation before you make a final choice.
Once you have been able to answer these questions effectively, you will be in a much better position to begin building a policy that works for you.
Once you understand how a return of premium rider works, the pros and cons should be somewhat obvious. The most obvious advantage of adding one of these riders to your term life insurance is the fact that you will have a significant amount of money returned to you at the end of the term (assuming you are still alive) that would otherwise be kept by your life insurance provider. The most apparent con, on the other hand, is that your monthly life insurance premiums will increase.
However, even once you have clearly identified these pros and cons, making a final choice can still be quite difficult. A return of premium rider is not universally good nor is it universally bad—there will be plenty of situations where these riders do make financial sense, but for some families, the premiums saved will be better invested elsewhere. Though your life insurance company can certainly provide you with a significant amount of useful advice and information, only you can be the one who is able to make the final decision.
If you are considering purchasing a term life insurance policy, you may be wondering what exactly happens if you happen to outlive your term. Many life insurance providers offer a “return of premium rider” that makes it possible for the money you have paid in premiums over time to be returned to you (usually) in full. However, as you would probably expect, any rider offering additional benefits such as this will require you to pay more for life insurance each month. Knowing which choice is right for you will require a careful evaluation of the costs, benefits, and factors that are specific to your financial situation.