For many of you, the idea of buying life insurance has one big flaw. What happens if you buy a 20- or 30-year term policy and outlive it? Yes, there are options that cover you for your entire life, but they're more expensive. If you're on a budget, term life insurance is your best bet. But there we are again, asking the same question: can you get any of your money back if you outlive your term? You might be surprised to hear that the answer is yes.
Return of Premium Policies
Let's cover the basics first. As you may know, a term policy provides coverage for a specific number of years. If you pass away during that term, the insurer pays the face amount of the policy (also called the death benefit) to your beneficiaries. If you live longer than the term, or if you cancel your policy during the term, the insurer doesn't pay anything.
With an ROP policy, the insurer pays back all your premiums at the end of the term, as long as you haven't died or cancelled your coverage. Some insurers even pay back a pro-rated portion of your premium if you cancel your policy before the end of the term. The premium returned to you isn't generally considered ordinary income, so you won't have to pay income taxes on the money you receive from the insurance company.
So what's the catch?
Unlike permanent life insurance that builds cash value over time, the payments you make on an ROP policy generally don't earn interest or appreciate in value. Also, the premium you get back may not include any extra you paid for additional services, such as a rider for disability or long-term care.
Should I Choose ROP or Straight Term?
That depends on your needs and budget. ROP can cost a lot more than a straight term policy. It depends on the insurer, your age, the amount of coverage, and the term length. But ROP almost always costs less than a permanent life insurance policy with the same death benefit. You'll also have to think about long you need coverage. While you can buy straight term policies with terms as short as one year, most ROP policies have terms of 10 years or longer.
Is ROP the Best Use of Money?
You've probably heard at least one popular financial pundit tell you to "buy term and invest the difference." This suggestion is based on two assumptions. The first? That you know how long you'll need coverage (until your mortgage is paid off, for example). The second assumption is that you'll be able to get a better return on your money from other investments. You can use that same rationale to think about an ROP policy. Since your premiums don't earn interest while with the insurer, you're not making any money. As an alternative, you could pay lower premiums for a straight term policy, and invest the difference to try and accumulate more savings.
But keep in mind that term life insurance isn't meant to be an investment. It's meant to insure against financial hardships that may occur due to your death. If your family depends on your income to provide for living expenses and education needs, term insurance covers you with minimal cash outlay. You're buying peace of mind, in other words - not an investment strategy. If you really are looking for an investment vehicle, a permanent life policy may be a better choice.
Is ROP Right for You?
As you're deciding, ask yourself:
- Does the added cost of ROP fit into your budget? It's great to know you can get your money back if you outlive the term of your life insurance coverage, but there's a cost for that benefit. Also, if you die during the term of insurance coverage, your beneficiaries will receive the same death benefit from the ROP policy as they will from the less expensive straight term.
- How much coverage do you need?
- How much can you afford to spend?
- How long do you need this coverage to continue?
