What is Return-Of-Premium Life Insurance?

Jim B.
Jim B.
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Return-of-premium life insurance is life insurance bought by an individual in which the premium paid into the insurance account is returned to the individual at the end of the policy term. This allows an individual to recoup all of his investment if he should outlive the term of the policy. Like other life insurance policies, a return-of-premium life insurance policy pays out benefits to specified beneficiaries upon the death of the person holding the policy. The drawbacks of this type of policy are the cost and the fact that the money paid for the premium might be invested by an individual for a better return.

Life insurance is a popular way for people to leave behind wealth to the ones they love after they die. The basic concept is that an individual pays a premium amount into an insurance account, which triggers insurance benefits for the named beneficiaries at the time of the policy holder's death. Many people consider the money spent on life insurance policies as an investment, and a return-of-premium life insurance policy, also known as an ROP policy, is one way to protect those investment dollars.

A return-of-premium life insurance policy is set up like a term-life insurance policy in that it covers the individual who buys it for only a certain period of time, known as the term. With an ROP policy, the term is usually somewhere between 20 and 30 years, although terms may vary depending upon the insurance provider and the consumer's needs. At the end of the term of the ROP policy, the person holding the policy, if she is still alive, receives all of the premium she had paid into the account.

This is the big difference between a return-of-premium life insurance policy and a normal term-life policy. If a person outlives the term in a term-life policy, he gets no return on the premium paid into the account. An ROP policy also benefits a consumer who only needs the coverage for a certain amount of time. For instance, a person may have children who will be all grown at the end of a 20-year term, so they won't necessarily need the benefits at that time in their lives.

Unfortunately, the cost of a return-of-premium life insurance policy can be prohibitive compared to normal term-life policies. For that reason, some insurance experts suggest that consumers take a term-life policy and then invest the money saved by not buying an ROP policy. A consumer choosing this strategy can get a larger return on her investment than if she had an ROP policy, which would provide her with no net gain.

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