Return of Premium Term Life Calculator
Is return-of-premium (ROP) term life insurance worth it? Compare the refund at the end of the term with buying standard term and investing the difference, and see the return the ROP rider really earns.
How it works
Extra premium D = ROP premium − standard premium · refund = ROP premium × years · invest the difference: FV = D × [(1 + r)ⁿ − 1] ÷ r × (1 + r) (premiums paid at the start of each year) · ROP return = the rate r at which FV = refund · refund in today’s money = refund ÷ (1 + inflation)ⁿ
Return-of-premium term life insurance refunds every premium you paid if you are still alive when the term ends, but it costs two to three times as much as standard term cover. The fair comparison is to buy the cheaper standard policy and invest the difference every year: the rate at which those extra premiums grow into the refund is the real return of the ROP rider. That return is guaranteed and usually tax-free, but often modest, inflation shrinks the refund, and if you cancel early you may get back little or nothing.
Worked example
Standard 20-year term costs 500 a year and the return-of-premium version 1,400, so you pay 900 extra each year. At the end you get back 20 × 1,400 = 28,000.00 (about 17,087.59 in today’s money at 2.5% inflation). Investing the 900 a year at 5% would grow to 31,247.33 instead. The refund equals a return of only 4.04% a year on the extra premiums, so standard term plus investing the difference wins by 3,247.33.
Sources: Wikipedia — Return of premium life insurance · NerdWallet — What is return-of-premium life insurance?
Frequently asked questions
Is return-of-premium life insurance worth it?
Only if you would not otherwise invest the difference and value the forced saving and guarantee. The built-in return is usually about 3% to 5% a year, below long-run stock returns, and only if you keep the policy for the full term.
What happens if I cancel an ROP policy early?
Many policies refund nothing in the first years and only a partial percentage later. Check the surrender schedule — early cancellation can make ROP much worse than standard term.
Is the refund taxable?
In many countries the returned premiums are not taxed because they are a return of your own money, but rules differ. Confirm with the insurer or a tax adviser.
How much more does ROP cost?
Typically two to three times a standard term premium for the same age, health and cover, and the gap grows with age.
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Educational estimate, not insurance advice. Policy wording, deductibles, depreciation schedules, surcharges and clauses differ by insurer and country — read your policy and ask your insurer or a licensed agent before deciding.