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The Ultimate Analysis of Return of Premium Life Insurance

Return of premium life insurance sounds like a win-win. If you die, your family gets your death benefit. If you live, you get your money back.

As with most decisions involving money, you need to dig deeper to get to the truth of the matter.

Quick aside. You will find many articles and posts either promoting return of premium or blasting it. Our goal here is to provide an analysis of several scenarios in which a policy has a return of premium rider. We then compare that to if the same person had skipped on the rider and done other things with that money. The information is here for you to make an informed decision without needing to do the math yourself. (Although we recommend doing the math in all financial decisions.)

What is Return of Premium?

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It sounds like a good idea, but return of premium isn't right for everyone. You need to decide how best to use that money. Whether it is on return of premium life insurance or other investments.

Life insurance gets a bad rap. You hear people say "it's betting against yourself." No one wants to do that. But the reality is everybody dies. We just don't know when. So you may outlive your term life insurance policy.

Return of premium is a life insurance policy rider that says the life insurance company will return all the premiums paid at the end of your term. A rider is simply an extra provision of the policy you can purchase. It's like getting fries with your burger. Pay a little more. Get a little extra.

What's the catch?

Return of premium is expensive. The nature of insurance is everyone pays a little so that the people who need it get covered. The industry calls this spreading the risk. Most people outlive their term life insurance policies. So the insurance companies use that money to pay the death benefits of the people who don't.

Returning all the premiums paid means the company doesn't have that money to pay out to those who submit claims. They only have the returns on their investments.

This means that adding a return of premium rider is expensive. It can double the cost of your policy. It's not always that high, but prepare yourself if you get return of premium life insurance quotes. Because sometimes it's even more than double.

Anything else I should know?

Two things. If you let your return of premium life insurance policy lapse (or cancel it), you won't get your premiums back. You have to hold it until the end of your term.

Second, the return of premium is non-taxable. Principles don't get taxed and that is what you're getting back. Makes sense. This is important and we'll look at the numbers shortly.

Sample Rates for a Return of Premium Life Insurance Policy

The following rates are for someone in generally good health. We used Preferred. If you are super healthy, your rates might be better.

Men​ - The Numbers

First, these are a rates for men with a 20 year term on return of premium (ROP) life insurance.

Male ROP

$100,000

$250,000

$500,000

$1,000,000

Age 25

$18.88

$38.06

$70.04

$133.98

Age 35

$27.23

$58.94

$111.79

$217.50

Age 45

$58.29

$136.59

$267.09

$528.09

Age 55

$123.10

$300.58

$595.08

$1,184.07

These are for men without return of premium. Again, monthly rates, preferred health, 20 year term, non-smoker.

Male w/o ROP

$100,000

$250,000

$500,000

$1,000,000

Age 25

$10.27

$15.93

$26.25

$47.25

Age 35

$10.94

$16.84

$28.44

$49.88

Age 45

$17.15

$33.56

$61.12

$113.11

Age 55

$34.74

$77.66

$148.62

$283.97

Huge differences, right? Just to make those super clear, this next table is the number of dollars every month you would pay for having all your premiums returned to you at the end of 20 years.

Monthly Difference

$100,000

$250,000

$500,000

$1,000,000

Age 25

$8.61

$22.13

$43.79

$86.73

Age 35

$16.29

$42.10

$83.35

$167.62

Age 45

$41.14

$103.03

$205.97

$414.98

Age 55

$88.36

$222.92

$446.46

$900.10

To put that in perspective, this is what it would be total for those 20 years.

20 Year Difference

$100,000

$250,000

$500,000

$1,000,000

Age 25

$2,066.40

$5,311.20

$10,509.60

$20,815.20

Age 35

$3,909.60

$10,104.00

$20,004.00

$40.228.80

Age 45

$9,873.60

$24.727.20

$49,432.80

$99.595.20

Age 55

$21,206.40

$53.500.80

$107,150.40

$216,024.00

Just take a moment and think about how much money that is relative to your income. If it seems pretty major, ROP might not be for you. If you just shrugged at the numbers, it might be something to consider if you meet the conditions we recommend. (Skip the women's rate section to see recommendations.)

Women - The Numbers

 Female ROP

$100,000

$250,000

$500,000

$1,000,000

Age 25

$13.75

$25.23

$44.37

$82.65

Age 35

$21.14

$43.42

$81.35

$156.60

Age 45

$43.15

$101.79

$197.49

$388.89

Age 55

$80.13

$231.64

$457.18

$908.28

These are what life insurance premiums for a healthy woman without return of premium might look like.

 Female w/o ROP

$100,000

$250,000

$500,000

$1,000,000

Age 25

$8.44

$11.96

$17.83

$29.58

Age 35

$10.09

$14.87

$24.50

$38.50

Age 45

$14.52

$26.25

$46.81

$85.13

Age 55

$26.69

$56.66

$104.75

$199.58

Below are the monthly differences between a ROP and traditional life insurance policy. Below that table are the contract lifetime (20 year) differences.

 Monthly Difference

$100,000

$250,000

$500,000

$1,000,000

Age 25

$5.31

$13.27

$26.54

$53.07

Age 35

$11.05

$28.85

$56.85

$118.10

Age 45

$28.63

$75.54

$150.68

$303.76

Age 55

$53.44

$75.54

$352.43

$708.70

 20 Year Difference

$100,000

$250,000

$500,000

$1,000,000

Age 25

$1,274.40

$3,184.80

$6,369.60

$12,736.80

Age 35

$2,652.00

$6,924.00

$13,644.00

$28,344.00

Age 45

$6,871.20

$18,129.60

$36,163.20

$72,902.40

Age 55

$12,825.60

$41,995.20

$84,583.20

$170,088.00

Some of these differences over the course of 20 years are pretty negligible. For example, if you are 25 and want to pay an extra $1274.40, you probably won't miss over the course of 20 years. But an extra $300+ dollars a month is a big deal to a lot of people.

Three Questions To Determine Whether Or Not ROP Is Good For You

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Think over these questions and talk with your spouse and financial planner. How can you spend as little on life insurance as possible?

If the prices didn't scare off your wallet, honestly answer these three questions before making a decision about purchasing return of premium life insurance.

Can I afford it?

If you're eating ramen, probably not. If you looked at the monthly difference and tried to think of things to give up to buy return of premium, still no. Life insurance is important, but we don't want you to deprive yourself of important things just to get it.

How else would I use that money?

If you've determined you have the disposable income to easily cover the monthly differences between a ROP policy and a traditional policy, think of what else you could do. Especially those financially responsible things people know they should do, but just don't quite get around to.

For example, how much do you contribute to your retirement accounts every month? Are you pretty good about contributing? Alternatively do you think that you should get around to doing that at some point? What about other investments or savings for major things like the down payment on a house?

If you do all the things you should be doing and still have disposable income to cover the extra cost of return of premium on your life insurance, good job. If not, making an automated monthly contribution to retirement savings makes the process super easy.

What course of action would best negate the cost of your life insurance?

Let us suppose that instead of buying return of premium, you put the money you would have spent on the rider in an untouchable savings account. At basically negligible interest (for most banks at the moment), you would subtract the money you saved from the cost of your life insurance and see if you came out ahead. How much did you life insurance actually end up costing you.

​With return of premium, your unused life insurance policy didn't cost you anything.

But could you do better? What if you are a savvy investor and know all the right stocks or real estate investments? Sure, over 20 years, you could use the money you would have spent on the ROP rider to more than make up for the cost of the insurance policy. Probably with a little extra.

But then you have to ask yourself, "Am I really going to do this?" Because if you are completely honest with yourself and you don't usually follow through, it would be a better bet to force yourself into recouping the cost of your life insurance through return of premium than to not follow through with a potentially more lucrative investment strategy.

How Abrams Insurance Solutions Can Help

As independent agents, we have access to over 70 unique life insurance companies. So we can shop the market for you. Which in turn saves you time and money.

We are happy to look into whether return of premium is a good fit for your family's situation and give you and honest opinion about whether or not it's right for you. Because many life insurance products are great for some families while being poor choices for others.

Protecting your family for a price that makes financial sense for your wallet is our primary goal.

You can compare the costs of policies without return of premium for yourself using our Instant Quotes tool on the left. (Top if you're on mobile.) The quoter on this site does not show Return of Premium cost. Give us a call and we would be happy to compare the costs for you.

About Chris Abrams

Chris and his team work with clients across the country to help them navigate the insurance and financial world. His mission is to help people and businesses have the protection they need at the lowest possible price. He works on behalf of his clients and not the insurance companies. When not researching the latest financial and insurance topics, Chris can be found spending time with his family, traveling, cooking or running on the beach.

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