How to Get All Your Money Back From Your Term Life Insurance Policy.
I Outlived My Policy, and the Insurance Company Sent Me a Check for $36,000.
Thirty years ago, I bought a 30-year “Return of Premium” term life insurance policy. My friends with regular term policies made fun of me for paying a higher premium. For 30 years, I paid my bill. My family was protected. Last week, the term ended. I was still alive and kicking. A few days later, a check arrived in the mail from the insurance company for every single penny I had ever paid them in premiums. It felt like I had free life insurance for 30 years and won a lottery at the end.
The “Free Insurance” Myth of Return of Premium (ROP) Policies.
My “Free” Insurance Cost Me Over $150,000 in Lost Growth.
Getting my premiums back from my ROP policy felt great, until my financial advisor showed me the “opportunity cost.” The extra $120 a month I paid for the ROP feature, if invested in a simple S&P 500 index fund over those 30 years, would have grown to over $180,000. Instead, I just got my original $43,200 back. My “free” insurance wasn’t free at all; it cost me a fortune in potential growth. It was a sobering reality check that shattered the illusion of getting something for nothing.
Is ROP a Good Investment? A Brutally Honest Mathematical Breakdown.
The Internal Rate of Return is Shockingly Low.
I looked at my Return of Premium policy as an investment. I was paying an extra $1,500 per year to get a guaranteed return of all my premiums in 30 years. When I calculated the internal rate of return (IRR) on that extra premium, it was about 1.8%. I could have gotten a better guaranteed return from a government bond, with a lot more liquidity. The math is clear: as a pure investment, an ROP policy is a terrible one. Its value is psychological, not financial.
Why “Buying Traditional Term and Investing the Difference” Usually Wins.
My Friend’s Simple Strategy Crushed My “Fancy” Policy.
My friend and I both got life insurance 20 years ago. I bought a fancy ROP policy for $150/month. He bought a traditional term policy for $50/month and diligently invested the $100 “difference” into an index fund every single month. Today, my ROP policy is chugging along, promising to give me my premiums back in 10 years. His investment account for the “difference” is already worth over $75,000. By the end of the term, his simple strategy will have generated far more wealth than my “get your money back” gimmick.
The ONE Type of Person for Whom an ROP Policy is a Genius Move.
The Undisciplined Saver Who Knows Themselves.
My brother is terrible at saving money. He admitted to me, “I know I’m supposed to ‘invest the difference,’ but I won’t. I’ll spend it on something stupid.” For him, a Return of Premium policy is a genius move. He chose to pay the higher premium because he views it as a “forced savings” plan. He gets the protection his family needs and knows that, because he is forced to make the payment, he will get a big lump sum back at the end. He’s using the policy to protect his family from his own lack of discipline.
The Opportunity Cost of Overpaying for an ROP Policy for 30 Years.
I Got My Premiums Back, But I Lost a Comfortable Retirement.
I chose a 30-year ROP policy. The extra premium I paid over a standard term policy was about $200 per month. I felt smart, knowing I’d get it all back. But that $200 a month, invested over 30 years, would have grown into a nest egg of over a quarter of a million dollars. Getting a check for my $72,000 in premiums at age 65 felt good for a day, but the realization that I could have had a significantly more comfortable retirement by choosing the cheaper policy and investing the difference is a hard pill to swallow.
A Side-by-Side Quote: Traditional Term vs. ROP. The Price Difference Will Shock You.
It Cost FOUR TIMES More.
I asked my agent for two quotes for the same $500,000, 30-year term policy. The first quote, for a traditional policy, was $60 per month. The second quote, for a policy with the Return of Premium rider, was $245 per month. I had to read it twice. It was more than four times the price. I would be paying an extra $2,220 every single year for the privilege of having my money held for me for 30 years. Seeing the raw numbers side-by-side made it one of the easiest financial decisions of my life.
The Forced Savings Aspect of ROP: Is It a Bug or a Feature?
It Depends Entirely on Your Own Financial Discipline.
Whether the “forced savings” nature of an ROP policy is a good or bad thing depends entirely on you. If you are a disciplined investor who will automatically invest the savings from a cheaper term policy every month, then ROP is a bug—a horribly inefficient product. But, if you are like most people and know that the “difference” will likely get absorbed by lifestyle creep—more lattes, more dinners out—then the forced savings can be a valuable feature, ensuring you end up with something rather than nothing.
What Happens If You Cancel Your ROP Policy Early? (Hint: You Get Nothing).
The Golden Handcuffs of ROP.
I had a return of premium policy for 12 years. I was paying a high premium, but I was comforted knowing I’d get it back. Then I lost my job and could no longer afford the payments. I called the company to cancel and asked how much of my premium I would get back. The answer was zero. The “return of premium” feature only kicks in if you keep the policy for the entire term. If you lapse it early, you forfeit all the extra money you’ve paid. It was a painful and expensive lesson.
The Psychological Payoff of Getting That Big Check Back After 30 Years.
It Feels Like You Won.
My dad outlived his 30-year ROP policy. A check for over $50,000 showed up in the mail. Intellectually, I know he would have been better off investing the difference. But I can’t deny the pure joy and psychological victory he felt. He held up the check and said, “See? I told you it was a good idea! Free insurance!” That feeling of having “won” against the insurance company, of getting this big, unexpected windfall, provided an emotional return that, for him, was worth more than any spreadsheet could calculate.