Return of premium (ROP) riders on life insurance policies can be helpful for individuals who have limited income to fund continuous insurance coverage or those under special circumstances. These include but are not limited to those who want to maximize income from middle- to high-risk occupations by contracting their tax exposure as well as divorcees who are required to secure life insurance policies with their former spouse as a beneficiary. Regardless of your situation, it is important to understand exactly what ROP insurance entails. It will not grow your money efficiently; it will only provide security. Thus, if it is solely security you are after, ROP insurance may be suitable in your case.
Is Return of Premium an Attractive Option?
Because ROP riders allow for the return of premiums upon the policyholder outliving a policy, it seems to be a better option in comparison to a standard term life insurance policy. With the latter, you lose out on all the premiums invested in providing you and your family financial security, should you outlive the policy. However, with ROP insurance, you also lose out on the money for the period it's tied to the policy. This money, invested elsewhere, could grow much more in value. In fact, the marginal interest insurers provide is usually below the rate of inflation. It would be better to maximize the time value of money by placing it in investment instruments tailored to fit specific financial objectives. (Read Is Life Insurance With Return of Premium Right for You? to delve deeper into its pros and cons.)
Who Benefits from ROP Policies?
Despite the lack of growth of any money invested in an ROP policy, this form of life insurance may still benefit certain types of individuals in some ways. If you fall within one or more of the following three categories, you may want to consider purchasing this rider if you plan to invest in term life insurance.
1. Those Who Have Limited Resources to Continually Fund Life Insurance Policies
Perhaps one of the most immediate benefits of adding an ROP rider to life insurance policies is that it prepares policyholders for subsequent renewal of their policy. Because insurance premiums become more expensive as you age, it will cost more to maintain security on your life as time goes by (Read The Perfect Age to Get Life Insurance to help decide when you should invest). ROP life insurance policies prepare you for the transition from a policy with low to moderate premium payments to ones with higher premium payments by refunding you with startup money for the first few years of coverage of a policy purchased at a later age. This seamless transition from one policy to the next provides an incentive for purchasing an ROP rider.
More specifically, individuals in low- to middle-income brackets who have multiple beneficiaries can appreciate this benefit of ROP insurance. In sum, it allows people with limited income to maintain financial security on their life for their beneficiaries without completely sacrificing their money.
2. Those in High-Risk Occupations Who Want to Avoid Income Tax
Another incentive for purchasing ROP riders for life insurance policies is that the lump sum paid to you as the policyholder does not appear on your 1040 (Income Tax Return) as a form of income. Under the Internal Revenue Code, returns of principal may not be classified as income. This is almost universal throughout the world. Governments who recognize the lump sum payout after the expiration of the ROP insurance policy as a form of income only tax the interest.
This affords individuals who work jobs that require their lives to be insured a chance to maximize their income. Aircraft pilots, seamen and other individuals who work risky jobs can request their employers to instead purchase ROP insurance on their behalf by using a portion of their salary to pay off the premiums. This provides them financial security while allowing them to maximize their income over their career.
3. Divorced Spouses Who Must Name Their Ex-Spouse and Dependents as Beneficiaries
Countries that have legalized divorce often require the erring spouse to secure a life insurance policy naming the plaintiff spouse and any children they may have had as beneficiaries. This is to secure the support that the erring spouse ought to have provided to the plaintiff spouse and their children. In the event of the demise of the erring spouse, the plaintiff spouse and children can still receive support through the death benefit from the insurance company.
The period required for the erring spouse to support the plaintiff spouse and their dependents varies from country to country. The erring spouse will therefore incur twice the amount of expenses if obliged to provide support while paying premiums for the insurance policy. As such, it would be practical in this scenario for the erring spouse to purchase a return of premium rider for the insurance policy to later recuperate their money, should they outlive the policy.
Overall, return of premium life insurance is not a wise option for the majority of people as it keeps your money tied up without allowing it to grow as much as it would in other investments. Nevertheless, in comparison to standard term life coverage, it does have a major advantage as it does offer the promise of a full refund to those who outlive the policy. Moreover, individuals in certain special circumstances can still benefit from purchasing this rider in various ways as well. Therefore, considering your specific situation is the most important to finding the right life insurance policy, these 9 basic tips can get you started.