What Is Return Of Premium?

What is return of premium? This question was posed to Mark Webb, Executive Vice President, Governmental Relations, of Employers Direct Insurance Company. " Some disability insurers offer a "return of premium"...

This question was posed to Mark Webb, Executive Vice President, Governmental Relations, of Employers Direct Insurance Company. " Some disability insurers offer a "return of premium" (ROP) rider to their policies," Webb prefaces his reply. "This is not universally available and you should ask your insurance agent if they have access to a company that does offer such a program to its enrollees. As is the case with many insurance options, what return of premium riders look like depends to a large extent on the company that is writing the policy. In its broadest terms, a return of premium rider requires the insurer to refund a portion of your premiums after a specified period of time has elapsed. As is the case with all insurance products, however, different insurers will offer different ROP products."


"A return of premium rider is expensive," Webb points out. "It may run as high as 60% more than the same policy without the rider for the same coverage. That should raise questions in your mind if you consider that the additional premium dollars could be used to invest in a more traditional investment program. Furthermore, in some instances the return of premium rider means that - after the specified period of time has passed (most often this is 10 years) - the insurer will return 80% of the premiums you paid less any claims payments that were made during the ten years premium. In other words, if you actually have a claim during the time period that the return of premium rider governs, it is likely that you will receive little, if anything, in return as a result. Yet other policies repay only 50% of the premium and only if you are claim free."




"Some states do not allow disability insurers to offer return of premium riders at all," Webb continues. "You will need to check with your insurance agent or department of insurance in your particular state to see whether such a product is available to you. Perhaps the more important question to ask, however, is what investment goals do you have that would cause you to consider using a disability insurance policy for investment purposes. On the one hand, you purchase a disability insurance policy in order to protect you against lost earnings, but on the other hand you have paid additional premiums for a rider that will be of little or no use to you if you have to file a claim. If you want an insurance policy that can also be used for investment purposes, you are probably better off considering a life insurance policy that accrues a cash value than using a disability policy for such purposes."

"While ROP riders will be marketed as an investment option, if you are seriously considering this as part of your overall investment strategy you should first talk to a financial planning professional. There is a strong likelihood that better options are available to you while still securing the benefits a disability insurance policy is intended to provide."

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