The return of premium drivers (sometimes simply ROP) is a life insurance feature that reimburses all premiums paid by the insurance owner after meeting certain criteria. The most common example of this feature is the return of premium life insurance. For reimbursement of premium-insured life insurance, the insurance owner receives all premiums that are repaid when the premium payment period ends, provided that the insured is still alive.
However, the repayment of the premium function is not exclusive to lifetime insurance. There are several cash value life insurance policies that have a return on the premium feature available.
Example of Return of Premium Rider / Feature
Let's look at an example of a 40-year-old man who assumed the preferred risk of buying a $ 1
At the end of the 20-year level, if he is still alive, his total premium payments will be $ 75,200. The insurance company pays him $ 75,200 and reimburses him for all the premiums he paid. His death benefit coverage will cease at this time.
As you can see, this is a way to get additional benefits from a life insurance policy in addition to the peace of mind of knowing that you are covered against loss of income should you die while the policy is in effect.
But you should also understand that the insurance company will only refund the premiums you paid. There is no earned interest paid as part of this repayment.
How much does the Premium Rider refund cost?
Using the example above, if we remove the premium rider refund from the term life policy, the premium drops to $ 1,200 per year. So the rider costs the insurance owner $ 2,560 per year.
People often ask if the return on the premium function is worth it. The answer is subjective and it really depends on what you can achieve with the money you save if you opt out of the rider.
The most common argument against using the return of the premium function is that you can make a difference in cost and place it on the stock market. The claim is that this is likely to give you more money at the end of the premium payment period than the refunded premiums will do. If you did not choose the premium rider's return and invested the savings, you need an annual return compounded for 20 years of 3.5% to match what the rider provides provided your investment has no fees and you pay no taxes on the return on investment ( both assumptions are extremely unlikely).
So in this example, you can think of the return of premium drivers as a guaranteed 3.5% return on $ 2,560 saved each year. If you think you can do better than that, you can choose a regular term insurance and do whatever you want with $ 2,560.
Other insurance products that return / refund premiums
While premium repayment is most closely associated with life insurance, it is not just a term insurance function. Some universal life insurance policies include a return on the premium as part of the death. If you spend time researching universal life insurance, you will probably learn that there are two standard options for death benefits. Option 1 (sometimes Option A) is the death benefit option at the level. Option 2 (sometimes Option B) is an increasing option for death benefits (usually increases with the cash value of the insurance). But there are some universal life insurance policies that also offer a third option, which in some ways is an extension or an alternative to option 2. This "third" option is also an increasing death benefit, but instead of increasing with cash value increases are of the premiums which the insurance owner pays. Not surprisingly, this feature is commonly referred to as repayment of premium death benefit options .
In addition, some guaranteed universal life insurance policies offer return of premium riders / function. Guaranteed universal life insurance is practically permanent life insurance without cash value (some people call it "term life" without end). With this type of guaranteed universal life insurance, the repayment of premium options becomes available after a certain number of premium payments. For example, after 20 years, the insurance owner can choose to cancel the insurance and get all premiums he / she paid back from the life insurance company.
The whole life insurance, OG for ROP
Being a technical blog when it comes to life insurance, we would be extremely hesitant if we did not mention the whole life insurance when we discussed the premium repayment. The cash repayment value of an entire life policy is a confiscation benefit that originally not only sought to repay the premiums paid by an insurer if he / she canceled the insurance but also forced the life insurers to share the profit they earned on these premiums (this is why cash repurchase value is often becomes a number greater than the premiums paid by the insurer).
So while the whole life policy does not have a return on the premium function itself. They practically get a refund of the premium and in most cases return the premium with additional dollars in addition to those paid by the insurance owner.
It is also worth noting that there is no extra cost to an entire life policy to have this feature. Whole life insurance (and technically universal life insurance despite guaranteed universal life insurance) simply provides this benefit without an extra rider cost.