return of premium term life

return of premium term life

Return of Premium Life Insurance

How to Get Money Back from a Life Insurance Policy

If you are like most people, you have probably never heard of return of premium (ROP) term life insurance. According to LIMRA, an insurance industry research group, return of premium insurance only represents about 2% of term life sales, and at its peak in 2009 it only accounted for about 5% of sales.

Despite its lack of popularity, it can be an excellent product, offering both term life coverage and a refund of all of your premiums should you outlive the policy.

While this may seem like a “have your cake and eat it too” situation, there are a number of factors you need to consider before jumping into the ROP life insurance pool. Premiums can be high and you could earn a better return in the stock market, but ROP policies offer a full death benefit as well as the possibility of a cash windfall if you outlive the term.

What Makes Return of Premium Term Insurance Different?

In order to understand return of premium insurance or premium return life insurance, as it is also known, you need to know how term life insurance works.

Term life insurance is probably the simplest and least expensive form of life insurance. It insures your life for a specific “term,” which can be 1, 10, 20, or 30 years. If you die during the term, a death benefit is paid out. If you don’t die during the term, the policy terminates at the end of the term. Term policies are a great choice if you are concerned about your family having to cover large debts (think mortgage payment or credit card bills) if you die unexpectedly.

While everyone hopes to outlive a term policy, those that do often feel they have paid out a lot of money without seeing any benefit. A return of premium policy addresses those concerns. It is basically a term life policy with a rider attached that returns all of your premiums to you if you outlive the term. A major benefit of this type of policy is that the premium money returned to you is completely tax-free, as it is not considered income but simply a refund of premiums.

While return of premium life insurance sounds like a no-brainer, there are a number of things to consider that might make it a less desirable option, especially if you are older.

Pros and Cons of Return of Premium Life Insurance

Before purchasing any type of life insurance, it pays to understand the pros and cons of the kind of policy you are considering. A Trusted Choice® independent agent can help you assess your needs and determine if a return of premium policy is right for you. Here are just a few of the pros and cons of a return of premium coverage:

  • This policy pays out a death benefit, the same as a regular term policy, if you die during the term.
  • Premiums for an ROP policy are more expensive than a normal term policy; the price hike will vary depending on number of factors.

Will a Return of Premium Policy Work for You?

While term life insurance is a very simple product, whether adding a return of premium rider makes financial sense can depend on a lot of different factors.

Price: A return of premium rider will significantly increase your premium, especially if you are older. At a minimum, expect to pay 30% more for a return of premium policy when compared to a regular term policy if you are fairly young and in good health.

If you are older, in your 40s or above, and in less-than-stellar health, the price difference can be double or even triple the cost of a normal term policy.

Opportunity Cost: This basically means that you should calculate what you are giving up to go with an ROP policy instead of investing the money on your own. If you are a savvy investor and comfortable with risk, it may make more sense to buy the term policy and invest the difference that you would pay for return of premium life insurance on your own.

You may also want to consider a permanent life insurance policy such as whole or universal life. These policies have a cash value component that grows over time and in some cases can be a better investment.

Can You Afford the Policy? You will not get all of your premiums back if you don’t make all of the premium payments, so choosing a policy you can afford is important.

If you let your policy lapse, you won’t be alone. According to LIMRA data, 1 in 14 term life insurance customers stops paying their premium each year. The situation is not much better with permanent policies. These policies have a cash value component, but even that doesn’t help retention. About 25% of policyholders lapse their policies in the first 3 years, and this number jumps to 40% after 10 years.

If you let a return of premium policy lapse, you may get some of your premiums back. It depends on how long you have had the policy. While it can vary by insurance company, in most cases, if you cancel the policy in the first five years you will get back a big fat zero. The amount you get back then grows a small amount every year. In year 10 you might get back 10%, and it goes up from there.

Buy/Sell Agreements: If you are involved in a buy/sell agreement with a business partner, return of premium term life insurance can be a great choice. A partnership buy/sell agreement basically states that you will buy your partner’s share if they die first and vice versa. An ROP policy will ensure that you have the funds available to buy out your partner.

Return of premium policies also work well in divorce cases where one or both of the partners are required by the divorce decree to carry life insurance. A return of premium policy fulfills the life insurance obligation and returns the premiums if one or both of the partners live past the term.

Let’s say Bob, who is 40 years old, buys a 30-year term life insurance policy without the return of premium rider. His premium is $600 a year. He ends up paying $18,000 over the course of the policy and gets zero back if he outlives his policy.

Bob’s good friend Todd (who is the same age) buys a 30-year term life policy and elects to go with the return of premium rider. His premium is twice as much at $1,200 a year, so over the course of the policy he forks out $36,000, but all of that money comes back to him if he outlives the policy.

You need to decide whether recovering this money (assuming you outlive the policy) is worth the additional premium you will pay for that option.

The other takeaway here is that adding a return of premium rider can easily double the premium if you are older, so make sure that the cost of the policy fits easily in your budget.

Can You Make More Investing the Difference?

If Todd decides he wants to invest the additional $600 a year instead of paying for an ROP rider and puts the money in a Roth IRA that returns a very reasonable 7% a year, he will end up with $65,211 at the end of 30 years. This is a big increase over the ROP policy.

This is assuming that Todd is comfortable investing in an IRA, his income is not too high to take advantage of a Roth IRA, and he has the discipline to invest the $600 every year instead of spending it. It also assumes that the IRA fund returns 7% a year, which is definitely not guaranteed.

Anything less than an average 4% return will make the ROP a better option. While the numbers look good, it’s important to remember that returns in the stock market are never guaranteed, and the balance in your account can quickly tank during a downturn.

In the end, you have to decide if higher returns are worth the risk and if you have the stomach for the ups and downs of investing.

Work with an Independent agent to Make an Informed Decision

Return of premium life insurance can be a great way to make sure you have insurance in place for your family in the event the worst happens, and can also fund a nice windfall if you outlive the policy, but an ROP is not for everyone.

When shopping for a term life insurance policy, it is important to take a detailed look at the numbers and consider all of the options available to you. A Trusted Choice agent can help you analyze your needs and determine if a term policy, a return of premium policy, or even a permanent life insurance policy is the best option for your situation. Get started now by contacting an agent.

Term Insurance Return of Premium (TROP)

Embedded with all the benefits of simple term plan, TROP offers income replacement and premium refund at maturity. Compare these cost effective plans at PolicyBazaar before zeroing in on one plan.

How Term Return of Premium Life Insurance Plans Work?

Consider a policy with Rs 20 lakh cover for 10 years for which the yearly premium is Rs 2000. If the insured dies, the family will be paid Rs 20 lakh (sum assured). However, if the insured survives the term, the insurer will return the entire premium amount i.e, Rs 20,000 (Rs 2000x10).

Technically, a term plan with return of premium is a non-participating term assurance plan. When compared with a term plan following features are notable:

  • Term plan offers only death benefits whereas a TROP plan has maturity benefit as well.
  • Because of this guaranteed “all premium back” feature, it is slightly higher priced than a term plan

There is a one segment of customers who expect to get returns from an insurance policy. To cater to this section, companies have launched TROP plans. This type of term plan provides the dual benefit. Firstly, they give you peace of mind by providing financial security to the family in case something unfortunate happens. Secondly, the plan offers an assured premium return, which means total premiums paid during the tenure of the policy are paid back to the policyholder.

According to certified financial planners at PolicyBazaar, below are some top reasons to include TROP plans in your ambit.

  • Offers premium refund at maturity if a policyholder survives the tenure. So you don’t lose premium paid over the years. This makes the plan ideal for investors who are looking for term policy insurance covers but are not very keen on not receiving money back. As such, the term insurance return of payment plans try to get the best of both worlds – the large cover of term plans and the savings aspect of traditional plans such as endowment plans.
  • Provides assured returns on the total amount of premiums paid, which excludes additional premium(s) for enhances coverage with rider, (if any). Term insurance return of payment plans guarantee that the insured party will get their money back. The policyholders do not have to worry about their money not being returned back to them. Moreover, taking on additional riders that help build up savings means that the insured person may actually get back more than what they invested in the term insurance return of payment plan.
  • Optional riders that can be added handily for enhanced protection, making the plan offer comprehensive protection to the family, in case of unfortunate death of the policyholder.. Most insurance companies offer a range of optional riders that the insured party can take in addition to the term insurance return of payment policy. These can be taken at the time of signing up for the policy or added later. It is better to take the riders such as personal accident, physical disability, etc. at the time of taking the policy as they offer a comprehensive cover right from the time of signing up for the term insurance return of payment policy, and that too at a very low additional cost.
  • TROP plans offer more premium payment options like yearly, monthly, etc. Term insurance return of payment plans offer an individual the option to choose the payment option which suits them best. For instance, if the policyholder is starting out on his career or has other considerations to take care of, then the single payment options are the best as they are smaller amounts and have a lower impact on the outflow than the higher amounts that need to be paid if the quarterly, half-yearly or annual payment options are chosen. On the other hand, if the insured individual can make the payment, then opting for the annual payment option is the best as the overall outgo is lesser than the other alternatives in the term insurance return of payment plan.
  • Offers a ‘paid up’ option if you default on payment of premium. This feature makes these policies ideal for people who do not have a regular income but still need a policy that takes care of their needs.
  • Offers tax benefits as per the prevailing tax laws. Currently, the premium paid and the amount drawn are tax-free under section 80 C and 10 (10D) of Income Tax Act, 1961. The Income Tax Act offers a deduction up to Rs. 1.5 lakh if the sum is invested in the right vehicle. Conservative policyholders can use the premium they have paid for the term insurance return of payment plan to considerably reduce their tax liability.
  • Works on the level premium concept that requires paying a fixed premium amount, except the policy is lapsed. This particular feature makes this plan affordable and beneficial at different life-stages. The mortality tables used by the insurance companies provide a lower risk weightage to younger people. That is why the insurance premium is lower for people in the younger age group. The amounts gradually increase with age. Opting for a term insurance return of payment policy with a longer tenure when one is in his or her 20s means they have to pay the lower premium even when they are in their 30s or 40s.

Features of Term Insurance Return of Payment Plans

Term insurance return of payment policies, also called TROP plans, are different from term plans as they provide maturity or survival benefits in addition to the death benefits. Let us look at these features a bit more in detail so you can make a proper decision when you are looking for an insurance cover for yourself.

The sum assured in TROP plans refers to the life insurance cover that the insured person receives when signing up for the plan. The sum assured under these plans is generally higher than what is available for the same amount of premium under the traditional endowment policies. This is because endowment policies provide returns that are higher than the term plans and may also provide the payout over a considerably longer period. TROP policies, on the other hand, just return the premium paid by the insured person over the tenure of the plan.

Survival Benefits or Maturity Benefits

The survival or maturity benefits for a TROP plan is what makes it different from a traditional term policy. Under a term plan, the insured person does not receive any survival or maturity benefits. However, under a simple TROP plan, the insured gets back all the money they had invested as the premium for the plan less any taxes. In addition, in some cases, the insurance company may pay more than the premium paid provided certain conditions are met. For instance, Aviva Life Insurance Company offers a return of 110% or 10% return on the premiums paid in its Aviva i-Shield TROP plan. That means, assuming the person paid a premium of Rs. 39,000 per annum for 20 years, then he would get back Rs. 8,58,000 (Rs. 39,000 x 20 years x 110%) at the end of the 20 years.

The term insurance return of payment policies offer the nominees the sum assured if the unfortunate comes to pass and the policyholder does not survive the tenure of the policy. Various insurance companies also offer a higher sum that may be calculated as the higher of the sum assured, the maturity benefit, or a certain percentage of the premium paid so far. The companies may offer more benefits depending on the plan or mode of premium payment or the type of cover opted. For instance, policies with regular premium payment options may also have the option to receive a death benefit that is certain times the annualised premium. Moreover, policies with optional riders may have certain additional benefits.

The insurance companies have launched various term insurance return of payment plans that offer flexible payment options. In most cases, the insured person can choose the payment option that suits them best. The standard payment periods are on a monthly basis, quarterly (i.e. every 3 months or 4 quarters in a year), half-yearly and yearly. Some insurers also provide a single premium payment option as well as giving the insured the choice to pay for only a few years (say 10 years) and get cover for a larger number of years (say 30 years). Each payment option has its own benefits. For instance, the monthly payments are smaller in size while the annual ones are obviously higher. The single premium or premium for only a part of the policy tenure are higher sums than the yearly payments but provide the assurance that once they are taken care of, the insured person will not have to worry again about the premium for the Term insurance return of payment plan.

The surrender value of the TROP plans generally varies depending on the payment option. As a rule, the surrender value is generally more for single premium plans where the entire premium for the policy is paid at the beginning of the policy period. Insurers will have different ways of calculating the surrender value and people who are looking at TROP plans should make sure they know what they are getting as the amount they may receive will probably not be what they assume they will receive.

This is a benefit that may be provided under a TROP plan. Under this, as mentioned earlier, the plan continues if the policyholder is unable to pay the premium, though with a lower cover. Most companies require the policyholder to pay the premium for a minimum number of years before they offer this benefit.

Insurance companies offer various riders in addition to the principal cover. These generally include:

  • Personal Accident or Disability Rider: This provides a certain benefit if the insured is involved in an accident that may cause injuries, disabilities or even death
  • Critical Illness Rider: This rider covers certain illnesses such as heart attacks, stroke, cancer, certain cardiovascular surgeries and so on. The number of illnesses covered by different companies varies and people should ensure they take note of the ones the rider covers before they opt for it.
  • Hospital Cash: This rider provides certain cash benefits in case of hospitalisation due to certain pre-defined reasons.

The entry and maturity age varies according to the policies that insurers provide. People looking to invest in a TROP plan should make sure that they get the cover the need up to the age they need. For instance, opting for a 20-year TROP policy at 50 years of age when the maximum maturity age is 65 years does not make sense. The person should opt for 15-year tenure if they want the TROP policy.

Unlike traditional insurance plans that may provide a cover that last for the lifetime, a TROP plan lasts for only a certain period such as 10, 15, 20, 25 or 30 years. Most of these plans have a maximum maturity age below 70 years though some insurers provide cover even beyond 70 years.

Tips to Facilitate Easy Comparison of Available TROP Plans

Our insurance experts at PolicyBazaar have come up with handy tips to smoothen your insurance buying journey.

  • Do not consider only the maturity benefit while selecting the insurer. The ones offering higher return might not be the most cost effective.
  • Selection of Higher Sum assured has discount offers and thus a better proposition.
  • Go for highest term available under these term plans on offer; the policy term is not extendable later.

We are not only an insurance portal and dedicated towards offering low-cost premium quotes but we also pride ourselves on offering top notch customer services. Our well-versed licensed agents will be happy to supply the information you need so that you choose the best term plan.

Some Term Insurance Return of Premium Plans

  • Aviva i-Shield Plan
  • Aviva LifeShield Advantage
  • AEGON iReturn Insurance Plan
  • ICICI Prudential Life Guard - Return Of Premium
  • LIC Jeevan Mangal Plan
  • PNB MetLife Suraksha TROP
  • Tata AIA Life Insurance iRaksha TROP

PolicyBazaar provides knowledge and information you need to make best financial decisions. Submit basic details like your name, annual income, coverage, etc, to compare and find lucrative plans and prepare for life’s unexpected twists.

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How Does Return Of Premium Term Life Pay You Back?

Most of us buy life insurance to protect our families in case we die. But even we buy a term policy that that will last for decades; we do not really expect to pass away during that time. If your application passed through underwriting, that is a good indication that the life insurance company does not expect you to pass away either. Of course, if you do buy a traditional term policy, and if you do survive it, you will have nothing left at the end of the contract except the satisfaction of having covered your family and surviving.

You Should Still Consider Buying Term Life

Of course, that brings up the issue of why many people never do purchase a policy. Some consumers talk to an agent or shop online to get the best insurance quotes. Then they add up all of the premiums they may pay over the course of decades, and the amount alarms them.

Let us say you pay $50 a month for a fairly large 20 year term policy. Over the course of those two decades, you will have spent $12,000. At the end, your policy will have no cash value or coverage left. Of course, if you did pass away, your family could collect the death benefit. But remember – we are not planning to pass away.

Return of Premium Term Life May Pay You Back

To counter this objection, some insurers came up with an extra rider (option) called return of premium (ROP). This option costs extra, but it provides one benefit that many term life buyers find attractive. If you keep your term policy in force, and if you survive the length of the contract, you get all of your money back. This includes the money you paid for the policy, and it also includes the money you paid for the extra rider.

For our example, let us say that the ROP rider cost an extra $5 a month. Now you are paying $55 a month instead of $50. This means you would pay $13,200 over the length of the 20 year term. At the end of this period, you could get a check back for the entire amount.

Now keep in mind that the figures I used are just meant to provide an example, and not to illustrate any particular policy. Your premiums, and the cost of the extra rider, will vary by your age, health, the amount of coverage you want, etc. If you want to find out how much return of premium term life costs, you can get quotes online or from a good, local insurance agent.

Many people purchase term policies to last until they are near retirement. They find the benefit of getting a check back for a substantial amount of cash attractive, especially since they may not have saved that extra money anyway if they did not have an insurance premium to pay.

This content is not provided or commissioned by the bank advertiser. Opinions expressed here are author’s alone, not those of the bank advertiser, and have not been reviewed, approved or otherwise endorsed by the bank advertiser. This site may be compensated through the bank advertiser Affiliate Program.

Return of Premium Term Life Insurance

Have you ever heard of return of premium term life insurance? If you haven’t, you’re not alone.

Most insurance plans are purchased in the hopes of never having to use them. For example, just because you have health insurance doesn’t mean you want to get sick, and you don’t buy car insurance in the hopes of getting into an accident.

Life insurance is similar.

You don’t want to think about the purpose of the plan, but it will definitely help your beneficiaries at the time of your death. That is of course, unless you purchase term life insurance and outlive the policy.

With term life insurance, a person purchases a plan for a fixed period. If the policy holder passes away during the term period, the beneficiaries will be paid the death benefits. If the insured outlives the term period, the benefits are no longer in effect.

Paying into a life insurance policy that has a finite term is one of the arguments for buying for whole life insurance. Though there are times it makes sense to buy whole life insurance, in most cases, term life insurance is a better option than whole life insurance for many people. Most people buy life insurance to cover the period of time when they are at their peak earning potential with the goal of not needing life insurance when they reach retirement age.

Nevertheless, term life insurance is a popular option for individuals due to the affordability and protection offered during the term period. For individuals who want the benefits of term life insurance but do not want to risk paying premiums on insurance that may never pay out, return of premium life insurance may be a better option.

What is Return of Premium Term Life Insurance?

Return of premium life insurance basically provides the answer to the question, “what happens to all the money I’ve paid toward term life insurance if I outlive the term period?” With return of premium life insurance, if the insured does not pass away before the end of the term period, all of the premiums paid over that term will be returned.

How does return of premium term life insurance work?

To better understand how this policy works, consider the following examples of both term life insurance versus return of premium life insurance.

  • Term life insurance. If the insured purchased a 30 year term life insurance policy at the age of 40 at a cost of $1,000 per year, they will pay out $30,000 over the period of the policy. If the insured lives past 70 years of age, the insurance policy expires and neither the insured nor the beneficiaries are owed a thing.
  • Return of premium life insurance. If the same person chooses to purchase return of premium life insurance for the same period of time and they outlive the term, they are entitled to the full return of all premiums paid.

Is ROP life insurance a good deal for the consumer?

At first glance return of premium life insurance may seem like the obvious choice, whereas the insured has life insurance coverage over the term period, which if unused, costs them nothing.

The problem with this theory is return of premium life insurance is more expensive than your standard term life insurance policy for the same period. In some cases the same policy can cost up to 50% more over a 30 year period.

The difference in premiums is what allows the insurance firm to return all of the premiums because they have had the opportunity to invest the additional money over that 30 year period.

For this reason, it may make sense to purchase a standard term life insurance policy which provides the coverage you desire, while investing the difference in what you would have paid for return of premium life insurance. In this scenario you would still have the coverage while having the opportunity to earn interest on the difference.

You can make a similar analysis for buying other specialized life insurance policies, such as mortgage life insurance. Mortgage Life Insurance seems like a good idea on the surface, until you realize you are paying a fixed premium for decreasing benefits as you pay down your mortgage.

Whether or not return of premium insurance is a good deal is largely based on your risk tolerance and which type of policy feels more comfortable for you and your family.

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