The idea of getting premiums returned to you from an insurer you’ve been paying for years sounds very enticing, doesn’t it? Can it be true?
Yes, it can be — if you pay for an additional rider each month when you pay your disability insurance policy premiums. The rider is called a return-of-premium rider (ROP).
Let’s look at what exactly this rider is, how it works, what it costs, and if it’s worth adding to your disability policy. But first, a quick primer on disability insurance so you’ll know what you’re attaching the rider, too.
The number one reason people buy disability insurance is to receive a percentage of their regular paycheck from the disability insurer if they become ill or get injured and lose their ability to earn an income.
Typically, the monthly disability income amount you receive will be about 60% of what your earnings had been before you became disabled. You may be shaking your head and thinking, “I couldn’t live with a 40% pay cut!”
That’s a valid concern, but keep a few things in mind. First, the payment you receive isn’t taxable. Second, 60% will be about equal to what your take-home pay used to be after taxes, your retirement plan contribution, and your cost of benefits are subtracted.
Your cost to keep the paychecks coming: between 1% and 3% of your annual income.
We mentioned the number one reason people buy disability insurance is to get paid when they can't work. The number two reason: peace of mind.
It’s a nice feeling to lay your head on the pillow at night knowing that you’ll still be able to make your mortgage payment and meet all of your other financial obligations if you become sick tomorrow, or have an accident driving to work or elsewhere, and you’ll be laid up for an extended period of time.
In a nutshell, a return of premium rider pays you back some of the premiums you paid for your disability insurance, for which you’ll become eligible at a future date specified in your disability policy.
The amount you get back varies from policy to policy and is also specified in your policy. There are a variety of options that insurers offer.
For example, some insurers may pay you a percentage of the premiums you’ve paid every five years. So, if you’ve paid $5,000 in premiums per year for the past five years (a total of $25,000), and if the ROP rider stipulated that you receive 50% back of premiums paid, you would receive a check for $25,000 from the insurance company.
Other insurers will only pay ROP benefits when you cancel your policy, or it lapses, or upon your death if the policy was still in force. Still, other insurance companies will pay you back (some up to 100%) only if you reach an age specified in the policy, like 65 or 67.
Bear in mind that any amount you are eligible to receive back from the insurer will have any claims paid by the insurer deducted from the amount due. So, if you had $10,000 in ROP benefits coming to you, but you had $7,000 paid in claims to you, your net benefit would only be $3,000.
If you had a claim during the period of time before your ROP benefit is calculated, there’s a pretty good chance that you won’t receive any money back. As an example, if you have a $10,000 ROP benefit coming your way but you received $24,000 from an approved claim, you won’t be getting a check from the insurance company.
With the ROP rider, you may have the choice of taking the benefit paid to you as cash or using it to pay future premiums.
The ROP rider is, by far, the most expensive rider you can add to your disability insurance policy.
Let’s say, for example, that your disability policy without the ROP rider costs you $100 per month. By adding the ROP rider to your policy, that premium could jump from $300 to $400 per month.
But again, any money you receive back from your insurer will have claims paid deducted from it. So, if that resulted in no ROP benefits paid out to you, you could have paid three to four times the premium amount for the same amount of coverage.
When an agent or financial planner quotes you the additional premium it’s going to cost you each month to add the ROP rider, the first words out of your mouth very well might be, “Is it worth it?” You could very likely receive two different answers.
A commissioned insurance agent that stands to possibly triple their commission by adding the ROP rider to your policy could be tempted to try and persuade you to add it. But, in all fairness, not all agents will do this.
A fee-based financial planner has no monetary incentive whether you add the rider or not. It’s entirely possible they would advise against it because the extra premium you would pay for the rider could be spent more wisely.
A savvy financial planner will talk to you about taking that difference in monthly premium and investing it. If the investment’s rate of return is high enough, it could be a smart move to decline the rider and put the savings into a growth mutual fund that has at least mirrored the stock market indexes, if not outperformed them.
Another benefit of investing the money you save on premiums – you’ll still be retaining the investment funds regardless of whether or not you received any benefits that would have offset some or all of your return-of-premium.
One of the nice things about disability insurance is that you get to pick and choose among the various riders offered to you. However, no matter which riders you select, if any, you’ll still have made one of the soundest financial decisions you’ll ever make by owning a disability insurance policy and protecting what is probably your most significant financial asset: your ability to earn an income.
Having grown up in upstate New York, Bob Phillips spent over 15 years in the financial services world and has been making freelance writing contributions to blogs and websites since 2007. He resides in North Texas with his wife and Doberman puppy.
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