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Term life insurance works much like car insurance. As long as you pay for the insurance, you are covered in the event of a loss. Usually, if the insured person never uses the insurance, meaning that person does not die while it is in effect, the policy owner gets nothing back. A version of term life insurance — return premium — works differently. With return premium insurance, if the insured person outlives the length of the policy, all premiums are returned to the policy owner. The policy owner can be the insured person, or someone else.
Return premium insurance, better known as return of premium (ROP) term life insurance, will generally cost more than a traditional term life insurance policy. The extra premium, or annual cost, allows the insurance company to make additional investments. The investment earnings can be used to pay back the premiums if a person outlives the insurance policy.
Many term life insurance polices offer optional benefits, called riders, for an additional cost. These riders can include partial death benefit payments for nursing home care, or care for the terminally ill. If the insurance owner adds any riders to the policy, the additional cost is not included in the ROP amount.
One challenge with return premium insurance is what happens if the policy is surrendered. When a policy is surrendered, it is canceled by the owner before the end of the term. Terms generally last from 10 to 30 years. Some policies will allow for a partial return of premium. Other policies will not return any premium if a return of premium policy is canceled before the end of the term.
As technology and healthcare continue to evolve, people can remain healthier and live longer. This can cause term life insurance rates to go down. Many insurance owners who surrender old policies for newer policies may get lower rates and save money if they are in good health. A return of premium term insurance owner faces the challenge of not recouping the extra cost of the ROP benefit when the policy is traded in.
Another, less popular version of return premium insurance adds the premium paid to the death benefit payout. When the insured dies, the beneficiary receives the policy's stated death benefit amount, plus the premiums that were paid. Usually, only premiums paid within a certain period of time, such as the first 10 years, are added to the death benefit. This is also known as increasing death benefit insurance. With this type of term life insurance, there is no benefit provided if the insured person outlives the policy.
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