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Return of premium term vs term plus investing: run the math yourself
A worksheet comparing a return of premium refund with investing the extra premium: formulas, a break-even rate, and how tax, inflation and lapses change it.
Return of premium (ROP) term insurance costs a good deal more than ordinary term, and in exchange it refunds the base premiums if you outlive the policy. The question every buyer eventually asks is whether the extra premium, invested elsewhere, would grow to more than the refund. That is a calculation, and you can do it yourself with a quote for each policy and a handful of assumptions.
This worksheet shows the formulas, a full worked example and the one number that matters most, the break-even rate. Every dollar figure is a made-up illustration with round numbers, so you can check the arithmetic. Real prices depend on your age, health and the insurer, and the returns used below are assumptions and not forecasts. The guides on return of premium term life insurance: is it worth it and buy term and invest the difference: does it hold up give the broader pros and cons; here the focus is the math.
What the worksheet compares
Two people buy the same death benefit for the same number of years.
- Buyer R buys the ROP policy, pays the higher premium and gets the base premiums back at the end of the term if the policy is in force and every premium was paid.
- Buyer T buys ordinary term, pays the lower premium and invests the difference every month in an account that earns an assumed rate of return.
If either buyer dies during the term, their beneficiaries receive the same death benefit. The two plans differ only in what happens to the extra money. That is what the worksheet isolates.
Step 1: collect two quotes
Get a quote for both policies with the same death benefit, term and health class. Write down:
| Item | Your number |
|---|---|
| Death benefit | $____ |
| Term in years | ____ |
| Monthly premium, ordinary term (call it T) | $____ |
| Monthly premium, ROP (call it R) | $____ |
| Extra premium each month, D = R - T | $____ |
Check one thing before going on: does the refund return the whole premium or only the base premium? Some contracts exclude premiums paid for riders, and a few return less than the full amount. If the refund is smaller than the premiums, use the smaller figure in Step 2.
Step 2: compute the refund
If the contract returns all base premiums, the refund is:
Refund = R × 12 × term in years
The worked example
Say a healthy 35-year-old compares two hypothetical $400,000, 20-year policies: ordinary term at $28 a month and ROP at $70 a month. These are invented round numbers.
- Extra premium: D = $70 - $28 = $42 a month
- ROP premiums over the term: $70 × 12 × 20 = $16,800
- Refund at the end of year 20, if the policy is in force: $16,800
- The extra money Buyer R puts in: $42 × 12 × 20 = $10,080
On the extra money alone, Buyer R puts in $10,080 and gets back $16,800, a gain of $6,720 over 20 years. Buyer T puts the same $10,080 into an account instead. The question for Step 3 is whether that account would grow to more than $16,800.
Step 3: grow the difference at an assumed rate
If Buyer T invests D every month at an annual rate r, compounded monthly, the value after n months is:
Value = D × [ (1 + i)^n - 1 ] ÷ i, where i = r ÷ 12 and n = months
You can use a spreadsheet's future value function, the buy term and invest the difference calculator or the return of premium term calculator instead of working the formula by hand. As a check, here is one case by hand: at r = 5%, i = 0.05 ÷ 12 = 0.0041667, and n = 240. The term (1 + i)^240 is about 2.7126, so the bracket is (2.7126 - 1) ÷ 0.0041667 = about 411.03. Multiply by D: $42 × 411.03 = about $17,263.
Repeating this for several rates gives the table below. The "factor" column is the value of $1 a month for 240 months, so you can reuse it with any D by multiplying.
| Assumed annual return | Factor for $1 a month, 240 months | Buyer T's account after 20 years (D = $42) | Compared with the $16,800 refund |
|---|---|---|---|
| 0% | 240.00 | $10,080 | $6,720 less |
| 2% | 294.80 | about $12,381 | about $4,419 less |
| 3% | 328.30 | about $13,789 | about $3,011 less |
| 4% | 366.77 | about $15,405 | about $1,395 less |
| 5% | 411.03 | about $17,263 | about $463 more |
| 6% | 462.04 | about $19,406 | about $2,606 more |
| 8% | 589.02 | about $24,739 | about $7,939 more |
Read the table from the top. If the extra money earns nothing, the refund wins by a large margin. As the assumed return rises, Buyer T catches up and then passes Buyer R.
Step 4: find the break-even rate
The break-even rate is the annual return at which Buyer T's account exactly equals the refund. In this example, it sits between 4% and 5%. Solving it more precisely gives about 4.76%.
What the break-even rate means:
- It is the return the extra premium must earn to match the refund. The refund works as a guaranteed return on that extra money, and 4.76% is that return.
- If you believe the money you would invest can earn more than the break-even rate over 20 years, after any costs, the investing plan comes out ahead on paper. If you believe it will earn less, the refund is the better deal.
- The break-even rate is not a forecast of what markets will do. It is a hurdle that the alternative must clear, and it is guaranteed in the sense that the insurer must pay it if you keep the policy in force.
The comparison has an asymmetry. The refund is a fixed promise from an insurer, while the investment return is uncertain and could be higher or lower, in one particular 20-year stretch or another. A higher expected return does not mean a higher result in the specific period you live through. The break-even rate says what the two plans need to match, not which one will win.
How the quote changes the answer
The break-even rate is not a property of ROP in general. It comes from the two quotes you hold, and the gap between them swings it widely. Keep the term at 20 years and the ordinary premium at $28, and change only the ROP quote:
| ROP monthly premium | Extra each month (D) | Refund ($ × 12 × 20) | Extra paid in (D × 240) | Break-even return |
|---|---|---|---|---|
| $55 | $27 | $13,200 | $6,480 | about 6.47% |
| $70 | $42 | $16,800 | $10,080 | about 4.76% |
| $85 | $57 | $20,400 | $13,680 | about 3.78% |
The break-even falls as the ROP quote rises because the refund becomes a smaller multiple of the extra money you pay. Divide the refund by the extra paid in: $13,200 ÷ $6,480 is about 2.04, $16,800 ÷ $10,080 is about 1.67, and $20,400 ÷ $13,680 is about 1.49. A pricier ROP policy hands back a smaller multiple of the extra premium, which is a lower guaranteed return and a lower hurdle for the investing plan to clear. Read the other way, a cheap ROP quote relative to ordinary term is a better guaranteed deal. The larger point is to run the numbers on your actual quotes instead of relying on a rule of thumb, since two quotes for the same buyer can differ a lot.
Two features of this arithmetic deserve a second look. First, the refund is paid once, 20 years out, and the investing plan pays out gradually if you use the account for other things along the way. Second, the multiple compares dollars paid in at different times with a single dollar figure at the end; the break-even rate corrects for that timing, and the multiple alone does not.
In every row, the refund is a fixed return and the alternative is uncertain. If you are comfortable with that uncertainty at the break-even rate for your quotes, the investing plan is a reasonable choice. If a guaranteed return of that size looks attractive next to your other safe options, such as a savings account or a bond fund you would otherwise hold, the refund may look better than it does next to stocks. Both views are defensible; the work is to state which one is yours.
Step 5: adjust for tax
The refund is generally treated as a return of what you paid, so it is usually not taxed as income, though you should confirm the treatment with a tax professional and your contract. Gains in a taxable investment account usually are taxed. To see the effect, assume a tax of 15% on Buyer T's gains. This is an assumed rate for illustration; your rate depends on your situation and the account type.
At 5%:
- Buyer T's account: about $17,263
- Contributions (the "basis"): $10,080
- Gain: $17,263 - $10,080 = about $7,183
- Tax at 15%: 0.15 × $7,183 = about $1,078
- After tax: $17,263 - $1,078 = about $16,186
After tax, Buyer T has about $16,186, which is less than the $16,800 refund. With this assumed tax rate, the break-even return rises from about 4.76% to about 5.35%. If Buyer T invests inside a tax-advantaged retirement account, the tax drag may be lower or absent, but that account has its own limits and rules, and the contribution may compete with money you would put there anyway.
Step 6: adjust for inflation
A refund paid in 20 years is in future dollars. At an assumed 3% annual inflation, $16,800 in year 20 buys what about $9,302 buys today ($16,800 ÷ 1.03^20). Buyer T's account faces the same erosion, so inflation does not change who wins at a given nominal return, but it does reduce what either number means for your family's budget.
For example, at 5%, Buyer T's $17,263 in future dollars is worth about $9,558 at current prices ($17,263 ÷ 1.03^20), and the refund is worth about $9,302. The gap is small, and both are less than the headline figures. Neither plan builds a fortune; each moves a few thousand dollars of today's money into the future.
Step 7: test what happens if you stop early
The comparison above assumes both buyers keep paying for the full term. Real policyholders do not always. If you lapse, the answer changes sharply, because many ROP policies return little or nothing in the early years and a rising share later. The contract states the schedule, so use the real one. For an illustration, suppose a hypothetical contract returns nothing before year 15.
| Stop after | Buyer R has paid in total | Buyer R gets back (this contract) | Buyer T's extra-money account at 5% |
|---|---|---|---|
| 5 years | $4,200 | $0 | about $2,856 |
| 10 years | $8,400 | $0 | about $6,522 |
| 15 years | $12,600 | contract-dependent | about $11,226 |
The cost basis is just months multiplied by premium: $70 × 12 × 5 = $4,200 and $70 × 12 × 10 = $8,400. Buyer T's account is still there when the policy ends, though it can be worth less than the contributions if markets fall. Buyer R's refund is a function of the contract schedule. In a lapse, the investment plan is more flexible. This is the point at which the discussion in what you get back if you cancel return of premium term early becomes practical: before you buy, ask for the surrender schedule in writing.
A note on term length
The worksheet works for any term length; only the numbers change. A longer term gives compounding more time, so the same break-even rate becomes more demanding. For instance, the factor for $1 a month over 300 months (25 years) at 5% is about 595.5 versus 411.03 over 240 months, so the investing side grows more than proportionally with time. The same period also gives you more time to lapse, relocate, change jobs or hit a hard stretch in which the premium is hard to pay. When you run the worksheet for a 30-year term, test the lapse table in Step 7 especially carefully, because a 30-year commitment is a long time to keep every payment current.
What the arithmetic leaves out
Numbers do not capture everything. Weigh these before deciding.
- Whether the extra money would really be invested. Buyer T's result depends on the monthly $42 actually being saved for 20 years. Behavior is the largest unmodeled factor. People who tend to spend it are better served by the forced saving of ROP.
- The size of the death benefit. ROP premiums are a multiple of ordinary term. If the higher price pushes you to buy a smaller policy, you lose protection. The ordinary-term plan can buy a larger amount for the same total outlay.
- The refund covers only what the contract says. Rider premiums and fees may be excluded.
- What else the money could do. The extra $42 a month could pay down a debt, which earns a known return equal to the loan's interest rate. Compare the break-even rate to that as well.
- Credit risk and guarantees. The refund depends on the insurer paying it in 20 years. Strong financial ratings and state guaranty association protection reduce that risk but do not remove it.
The myths that cluster around this choice are sorted in return of premium term myths: what the extra cost really buys.
Your blank worksheet
- Death benefit and term: $____ for ____ years.
- T = $____ a month. R = $____ a month. D = R - T = $____.
- Refund = R × 12 × years = $____.
- Extra paid in = D × 12 × years = $____.
- Assumed returns to test: ____%, ____%, ____%. Factor for each (from a calculator): ____, ____, ____.
- Buyer T's account = D × factor, for each rate: $____, $____, $____.
- Break-even rate (the rate at which line 6 equals line 3): ____%.
- After-tax check if investing in a taxable account: ____.
- Contract refund schedule if I stop early: ____.
Key takeaways
- The decision comes down to one number: the break-even rate, the return the extra premium would have to earn elsewhere to match the guaranteed refund.
- In this worked example, the break-even is about 4.76% before tax and about 5.35% if gains are taxed at an assumed 15%. Your own quotes will give different figures.
- The refund is guaranteed only if you keep the policy in force for the whole term. A lapse can forfeit it, while an investment account stays yours.
- Changing the assumptions moves the answer. Run low, middle and high rates and see whether you would choose differently.
- Do not let the higher ROP premium shrink your death benefit below what your family needs.