What is Return of Premium Life Insurance?
Return of premium life insurance is a type of term life insurance where you get your premiums back if you survive the term of your policy. Premiums under this type of cover are more expensive than normal life insurance policies.
Often shortened to ROP life insurance, this type of cover means that 100 per cent of the money you have paid for premiums over the years can one day be returned to you. Once you receive the money you can then use it for anything you wish.
Return of premium life insurance is a unique way of putting money aside for protection, but that money can then be used to fund an investment, send the kids to university or do anything you want.
Is Return of Premium Term Life Insurance Still Available in Australia?
Return of premium life insurance policies are no longer available in Australia. While once extremely popular, this type of cover came to be seen as inflexible and expensive.
As ROP insurance contained an investment component, its premiums were higher than those for term life insurance. However, while the guaranteed earnings you could get with whole life insurance were attractive, often the interest you received from the investment portion did not exceed the interest you could get by taking out a savings account with a bank.
In addition, return of premium policies were seen as inflexible when you needed to increase or decrease your level of cover. The amount of cover also did not keep pace with inflation, which then put your beneficiaries at risk of being underinsured when it was time to make a claim.
How did ROP Life Insurance Work?
As mentioned above, return of premium life insurance was a type of term life insurance where you got your premiums back if you survived the term of your policy. Also referred to as endowment insurance, ROP life insurance ensured a guaranteed payout if the policyholder was still alive at the end of the coverage period.
ROP insurance had a shorter premium-paying period than whole of life insurance, with the insurance amount paid out within a certain time period or when the policyholder reached a certain age. Premiums were paid until the so-called “endowment age”, which was when the cash value of the policy equalled its face value or the death benefit it offered. Death benefits were paid either at the time of death or in the form of a lump sum paid upon the policy’s maturity.
One of the advantages of return of premium life insurance was that, because you only had to pay premiums for a shorter period, you could build up a balance of cash faster than with other policies. The flexibility offered by the ability to receive a lump sum either at the time of illness or when the policy matured was another bonus.
Return of Premium Life Insurance Disadvantages
- Limited protection. Under a return of premium life insurance policy, protection was only provided for a specified period.
- High premiums. As a trade-off for the chance to get premiums returned, premiums charged under ROP life insurance policies were significantly higher than under other forms of cover. The higher cost can affect how much cover you can afford to purchase.
- Inflexible. Return of premium life insurance did not have the renewability of term insurance policies.
- No future cover. If your premiums were returned at the end of your policy term, you may not have been eligible (for example you may have been too old) to take out another life insurance policy.
- Money for nothing. If you cancelled your ROP policy or failed to make premium payments in time, you may have ended up without any refund at all.
Alternative to ROP Life Insurance - Term Life Insurance
With return of premium life insurance policies no longer offered in Australia, term life insurance represents the best option for those people looking to put insurance cover in place. Term life cover is the primary type of cover offered in Australia, offering flexibility and tailored coverage to people of all shapes in sizes. It provides cover for your financial obligations in the event that you pass away or are diagnosed with a terminal illness.
When examining how term life insurance works in Australia it makes sense to examine a handful of factors:
- Payment of benefit. Under term life insurance, a lump sum benefit will be paid if the policyholder dies or is diagnosed with a terminal illness and is not expected to live longer than 12 months. When you take out a term life insurance policy, you pay premiums towards an agreed benefit amount that your beneficiaries will receive when you die. The benefit can be used to pay off debts, such as the mortgage or credit card bills, or used as a stream of income to maintain your family’s lifestyle and pay for regular, ongoing bills.
- Benefits. Term life policies feature a range of benefits to offer comprehensive cover. As well as death and terminal illness benefits, term life policies typically include features like funeral advancement benefits, financial planning benefits, waiver of premium benefits and cover suspension benefits. Policies are indexed in order to keep pace with inflation and guarantee you won’t end up under-insured, while guaranteed future insurability means you can increase your cover without having to provide any further medical information.
- Additional options. Every term life insurance policy will also let you add a number of options to your policy to tailor your cover to suit your needs. These options include child cover if your child passes away or suffers a serious illness, discounted premiums, needlestick injury benefits, and the ability to increase your sum insured when a specified business event occurs without having to provide further medical information.
- Premium options. You can choose to pay either stepped or level premiums. Stepped premiums start off low and increase over time, and may be suitable for those with limited disposable income when they take out their policy. Level premiums, on the other hand, remain the same over the life of your policy. They offer the security of knowing how much you will have to pay, though they will initially cost more than stepped premiums.
- Cost. A number of factors can influence exactly how much your term life premiums will cost. These include age, gender, occupation, lifestyle (for example, do you smoke?), and whether or not you participate in any risky pastimes.
Compare Term Life Insurance Options from Australian Insurers
If you are interested in taking out term life insurance cover, you may wish to make an enquiry with an insurance consultant or compare policy options available from direct life insurance providers. Finder.com.au always recommends that you take the time to read through the product disclosure statement to ensure you have a clear understanding of the policy terms and conditions prior to application.