Return of premium (ROP) life insurance is built from a simple concept. When you purchase this type of coverage, everything that you invest into it is returned to you. If you should pass on before it expires, your family will receive it in the form of a death benefit. If you are alive when the policy expires, it will be returned to you in full to be reinvested, or perhaps used to purchase additional coverage depending on your needs. Although ROP coverage is based upon this fairly simple concept, there are many more subtleties to it.

ROP Basics

At its most fundamental level, ROP term life insurance offers coverage just like any other type of plan. You pay a certain monthly fee, and in exchange the company agrees to provide you with a set benefit should you die during the period of coverage. The only difference is that in this case, if the coverage expires without being used, the company agrees to pay you back all that you paid them. In this way, your money is never "wasted"; if it doesn't go directly to a death benefit, it is returned to you at the end of the period, nonetheless. With a traditional term plan, you wouldn't see any of that money returned to you upon the expiration of the term.

Examining The Return

Some sources may characterize return of premium as an investment, and from a certain perspective, it is. But one must always remember that it is term life insurance first and foremost; any investment potential should be a secondary concern in your decision to purchase. Your primary motivation for choosing this type of term life insurance should be that it provides good coverage, and will help keep your family protected and cared for should you be lost to them.

In technical terms, ROP is not an investment because your money does not grow while it is being used to pay toward the premium. You don't receive the money you gave the company plus interest when the policy expires; you simply receive the amount you paid. Any financial gain would purely be the result of deflation during the policy, and not of actual investment. Because of this fact, choosing ROP as an investment vehicle is a poor decision. If your focus is on investment, there are probably better ways to spend your money.

Downsides Of ROP

Although you do receive the money back in full if the period expires, the funds you put in are much more compared to what you'd pay for conventional term life insurance. Because you're paying dollar for dollar to get the coverage, you end up paying more out of pocket over the duration. With a conventional plan, you're basically paying the company to guarantee a certain benefit if you require it. Because there is no guarantee that the money you pay will be redeemed, the company can offer you a much lower rate, allowing you to pay less. With ROP, you will need to pay more because it will all be refunded at the end.

Investment Potential?

In most cases, if you can afford ROP term life insurance, you could afford to pay for conventional coverage and invest the difference. If you spent that money to get ROP, you would basically be putting it into a savings account at no interest – it will just be returned to you, or used for your benefit. But if you were to spend that extra money on a strong investment portfolio, you might well find yourself benefiting more than if you'd just kept the money tucked away.

To determine what's best for you, you should consult with both a financial planner and a life insurance policy specialist. The financial planner will help you understand where your finances stand, and can also advise you as to how much coverage you should seek. He or she can also describe market conditions and assist with planning for investments down the road. If the market is bad, it may certainly be better to invest in ROP rather than trying your luck with more volatile commodities. The plan specialist will be able to detail the advantages and disadvantages of ROP, helping you understand exactly what amount of coverage it will give you, and how it compares to similar conventional policies. Ultimately the decision is up for you, but you should seek all the advice you can to get the best results.

SEEK INDEPENDENT ADVICE. All information expressed in this article is intended to be general information only. You should not rely upon this general information to make legal, tax, investment, estate, or financial planning decisions. No portion of this article is intended to nor does it provide legal, tax, investment, estate or financial planning advice. For this type of advice, you must consult an independent advisor.