Return of premium life insurance
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Return of premium (ROP) life insurance is a type of term life insurance policy that returns a portion of the cumulative premiums paid if the insured outlives the policy's term.[1] For example, a $1,000,000 policy bought for $10,000 a year over a 30-year period would result in $300,000 being refunded to the surviving policyholder at the end of the 30 years.
If a return of premium policy is viewed as an investment, rates of return are calculated based on the incremental cost above the cost of regular term insurance. A sampling of policies found returns in the range of 2.5 to 9 percent.[1][2]
Critics point to the rate of return being less than in a typical investment, obviously before the insured's death, the extra cost of the policy compared to basic term life insurance policies and that, if the policy is canceled at any time, no money is refunded.
Many term life policies do allow prorated refunds at some point during the life of the policy, during the insured's lifetime, although such refund is usually "short rated", that is, it is significantly less than the imputed value of the refund if calculated using conventional tables, using the rate of return specified in the insurance contract. In some instances, where a contracted rate of return was 5.0 percent, the "short rate" proved to be 3.5 percent, but this fact was seldom, if ever, disclosed to the insured during the agent's "sales pitch".