insurance

Return of Premium

A type of insurance feature where the policyholder receives back all or a portion of the premiums paid if no claims are made during the policy term. This feature is commonly found in term life insurance policies and some health insurance plans.

Example

“Sarah chose a 20-year term life insurance policy with a return of premium rider, knowing she would get back all $24,000 in premiums if she outlived the policy term.”

Memory Tip

Think 'ROP = Return Our Payments' - if you don't use it, you don't lose it.

Why It Matters

Return of premium policies can provide peace of mind for consumers who worry about 'wasting' money on insurance they never use. However, these policies typically cost 30-50% more than standard term policies, so buyers should compare the extra cost against potential investment returns.

Common Misconception

Many people believe return of premium policies are always a good deal because you 'get your money back.' However, when accounting for inflation and opportunity cost, the returned premiums often have less purchasing power than if the extra premium costs had been invested elsewhere over the same period.

In Practice

John buys a $500,000 20-year term life policy. A standard policy costs $600 annually, while the return of premium version costs $900 annually. Over 20 years, John pays $18,000 for the ROP policy versus $12,000 for standard term. If John survives the term, he receives back $18,000, but if he had invested the extra $300 annually at 5% return, he would have accumulated approximately $22,275.

Etymology

The term combines 'return,' meaning to give back, with 'premium,' which comes from the Latin 'praemium' meaning reward or prize, referring to the payment made for insurance coverage.

Common Misspellings

return of primiumreturn of premeumreturn of premuimreturn of premiem

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