Return of Premium Life Insurance: What It Is, How It Works
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Return of premium life insurance is a way to pay the costs of your insurance over time and later receive a refund of your premiums — if certain conditions are met. Because of this benefit, Return of Premium (ROP) insurance typically costs more than traditional life insurance. While many insurance companies offer ROP as a rider on a term life policy, Guardian offers a ROP rider through a Universal Life Insurance policy, providing additional flexibility.
Find how Return of Premium insurance works and how to decide if it’s the right choice for your needs. We’ll also explore some other options that may be a better fit.
How return of premium life insurance works
Pros and cons of return of premium life insurance
Alternatives to ROP
Who should consider ROP life insurance
How Does Return of Premium Life Insurance Work?
Return of Premium (ROP) is a type of rider, or add-on, for a life insurance policy. The benefit of an ROP rider is that some or all of the premiums paid can be returned to you, depending on the policy terms.
Here’s how it works: When you choose a life insurance policy with a Return of Premium rider, you’ll pay your premium monthly, just as you would with any other policy. There is an additional premium for the ROP rider. You'll need to make regular payments to keep the policy active; no premiums will be paid if the policy lapses.
If you pass away while the policy is active, the death benefit will be paid to your beneficiary. But if you're still alive when the policy expires, your premiums can be refunded.
Usually, you'll find a Return of Premium rider as an option for term life policies, which have a set expiration date. However, Guardian offers ROP as a rider on universal life insurance, a type of permanent life insurance. Instead of refunding your premiums at the end of the policy term, Guardian's ROP rider provides exit points at the 15th, 20th, and 25th anniversary of your policy issue date. If you're still alive, the policy is in force, and you meet the policy funding requirements, you can elect to surrender the policy and receive:
Up to 50% of the premiums you paid at 15 years
Up to 100% at 20 or 25 years.1
Benefits of Return of Premium Life Insurance
The key advantage to Return of Premium insurance is the refund of premiums you've paid. These funds can come in handy, especially in later life, when you may wish to supplement retirement income or cover expenses such as a mortgage. It works almost like a forced savings plan: you pay your premiums reliably every month, and years down the line, your money is returned to you when you need it. It's one of the living benefits of life insurance.
A return of premium rider also grants you added flexibility; if you reach one of the policy’s refund milestones and determine you no longer need the coverage, you can surrender it to receive a refund of up to 100% of the premiums paid. That gives you more control over your life insurance coverage than you get with other types of policies.
This benefit is not taxable (aside from gains), so you can use the money however you wish.2 And because Guardian’s ROP rider lets you accumulate interest on your premiums, you can plan strategically for the future.
Considerations and Potential Drawbacks
There are some considerations to keep in mind before deciding whether a return of premium insurance policy is right for you.
First, because ROP provides an additional benefit, there is an additional cost compared to traditional policies. For example, Guardian's ROP minimum monthly premium requirement is $135.20. Although you can receive a refund of your premiums, there is an opportunity cost associated with saving this way since your funds are tied up in your policy until they expire or you reach an exit point.
Secondly, the rider itself has no cash value, so it can’t be surrendered and it can’t be reinstated if the policy lapses. Also, if the policy lapses, the premiums will not be returned.
Finally, the return of premium rider has what's called a "benchmark test," which is how the refund due (if any) is determined. This benchmark test can be complex, which could be a drawback for some.
Comparing Guardian’s ROP Life Insurance to Alternatives
A return of premium rider can help you recover up to 100% of the premiums you paid for your policy. But it's not available on every insurance product. You'll often find it as a possible add-on to a traditional term life policy, which can make that product more flexible but also more expensive.
Unlike temporary life insurance, which is what term life is, Guardian offers a return of premium rider on Universal Life coverage, which can provide additional flexibility and permanent coverage compared to term life. With Universal life, you control the premiums, and you can choose from multiple death benefit options. Plus, you're not locked into term-only structures.
However, not everyone is looking for permanent life insurance; a temporary, term life policy allows you to purchase coverage for specific needs. Without a Return of Premium rider, your premiums may not be refundable with a term life policy. If you choose a term life policy with an ROP rider, your premiums will be higher, but you'll receive a benefit equal to some or all of your premiums paid. This is different from a whole life policy that accumulates cash value.3
Those who are comfortable with investment risk might prefer to choose a simple term life policy and invest the difference instead.
Guardian’s Universal Life with return of premium rider4 | Traditional term life with no refund | Term life with ROP rider | Whole life insurance with cash value accumulation | |
|---|---|---|---|---|
Premium cost | More expensive than traditional term life | Usually one of the most cost-efficient insurance options | More expensive than traditional term life | More expensive than traditional term life |
Duration | Permanent, lifelong coverage5 | Until policy term ends (usually between 10 and 30 years) | Until policy term ends (usually between 10 and 30 years) | Permanent, lifelong coverage2 |
Refund | Yes, up to 100% | No | Yes | No |
Cash value | Yes | No | No | Yes |
Who Should Consider Return of Premium Life Insurance?
Return of premium life insurance may be good for:
Long-term, conservative savers.
Those who prefer predictable, tax-efficient returns.
Those who can maintain premium payments.
Risk-averse people
High earners
Parents or guardians
Those with a combination of age and policy duration that means they are likely to outlive their policy
For ROP universal life, those who desire more flexibility than other, term-based options
This type of insurance is less ideal for:
Those who want temporary protection with short-term affordability.
Those chasing high investment growth
Those with a strong appetite for risk, who may prefer a more aggressive strategy for accumulating value.
If you want… | Then consider … |
|---|---|
Cost-effective protection but no refund of premiums | Term Life Insurance |
Cost-efficient, simple coverage with some refund | Term Life Insurance with a Return of Premium Rider |
Lifetime coverage, wealth-building, tax advantages at a higher cost | Universal Life Insurance with a Return of Premium Rider |
Is Return of Premium Life Insurance Right for You?
Return of premium life insurance refunds your policy premiums if you outlive the policy or reach specified policy milestones. It can be a strong choice for long-term savers, especially those with a higher income who can afford the additional premium for this benefit. ROP riders are typically available on term life policies, but Guardian offers a flexible Universal Life product with this feature.
Guardian’s Return of Premium Life Insurance offers valuable protection and a refund of premiums—but is it the right choice for you? Speak with a Guardian Financial Professional today to explore your options.
Frequently asked questions about return of premium life insurance
If you struggle with forcing yourself to save for the future, a return of premium life insurance policy could be worth it. Although the premiums are higher for this additional benefit, you can be refunded some or all of what you paid if you keep your policy active. Speak with a financial professional to see if this insurance benefit is suitable for your goals.
Generally, the death benefit of a ROP life insurance policy is not taxable. The surrendered cash value or ROP benefit may not be taxable; however, any gains may be considered taxable income by the IRS. Consult with a tax professional to understand the tax implications of any life insurance policy.