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Long-term disability insurance protects your income by paying you a monthly benefit while you can’t work due to an accident or illness. Many factors affect your premiums, including age, gender, occupation, and benefit amount. A good disability insurance policy usually costs 2-3% of your annual income.
But did you know that you can get back the money you paid for the coverage? With return of premium disability insurance, you receive part of the premiums back if you don’t claim benefits.
Read on to find out how return of premium disability insurance works and whether it’s worth it.
What Is Long-Term Disability Insurance?
Did you know that one in three people will become disabled for 90 days or longer before age 65? Those with disabilities lasting longer than 90 days can expect to be disabled for 2.9 years.
Because of the prevalence of disabilities, one of the most crucial things you can do is to protect your income using long-term disability insurance. By paying a monthly benefit if you can’t work due to an injury or illness, disability insurance ensures your financial plans will remain intact if disaster strikes.
Disability insurance is especially essential for high-income earners. Not only do they stand to lose the most income in the event of a disability, but they also have substantial expenses to cover. For example, mortgage payments, car loans, groceries, utility bills, and other ongoing costs continue even after a disability.
However, disability insurance is not cheap. Depending on your age, gender, smoking status, and occupation, premiums can cost a few hundred dollars per month. What if there was a way you could get some of the premiums returned to you? Would it make the cost more palatable?
What Is The Return Of Premium Rider?
First, you have to understand what an insurance rider is. Riders are optional benefits that you buy to enhance your disability policy. For example, the cost of living rider increases your monthly disability benefit by inflation annually during a claim. This allows you to offset inflation’s effect on your purchasing power.
The ROP rider is another rider that you can buy. With this enhancement, the insurance company will pay you a tax-free benefit equal to 50% of the total premiums paid to date.
However, benefits are paid only under certain circumstances. First, any disability income paid to you will be reduced from the refund. Second, you will only get your money back after several years. Some insurance companies only refund at specific times, like when you reach age 55, 60, or 65. Others pay the benefit every seven years.
How much does the ROP rider cost?
It depends on the insurance company. Some let you add it for a small cost, while others charge a higher premium. For example, a 35-year-old male non-smoking accountant buys $5,000 in monthly benefits with a 90-day waiting period and an age 65 benefit period. With one insurer, it will cost him $15 in monthly premium to add the ROP rider. However, another one charges $59.
Why the large difference in premiums? The main difference between the two ROP riders is that the first one only pays out at your choice of age 55, 60, or 65, while the latter pays out every seven years. Also, coverage terminates after you exercise your option in the first, whereas it continues in the second even after refunding you the money. Here is a table showing the costs for different ages.
Cost of ROP at age 55, 60, or 65 | Cost of ROP every seven years | |
|---|---|---|
Male, 35 | $15 | $59 |
Female, 35 | $21 | $103 |
Male, 45 | $49 | $84 |
Female, 45 | $55 | $129 |
Male, 55 | $99 | $141 |
Female, 55 | $117 | $176 |
Is the return of premium option on a disability insurance policy worth it?
The primary purpose of disability insurance is to protect your income in case of an accident or illness. While the ROP benefit is appealing, it is not mandatory coverage. You’ll receive the monthly benefit or refunded premiums, but not both. So if you have the rider and become disabled, you’ll receive the same disability income as someone who didn’t pay extra for it.
Instead of this optional coverage, you may want to consider other riders. The previously mentioned cost of living rider is vital for fighting inflation. Aside from that, the own occupation rider may allow you to continue receiving benefits even if you work in another job. These are just a few riders you should get before the ROP rider.
Is it better to invest the ROP money instead?
One way to know if the ROP coverage is worth it is to compare it with investing the money used to buy the rider instead. After all, parking your money inside the disability policy is an opportunity cost when you can invest it. Let’s take a look at buying the rider first.
Using the 35-year-old male non-smoking accountant, the base disability insurance coverage costs $91/month. Adding the ROP rider brings it to $150/month. Since the insurer refunds 50% of the premiums paid after seven years (assuming no claims), he’ll get back $6,300 tax-free.
Alternatively, he could have invested the $59/month in a modest investment yielding 3% and ended up with $5,521 after seven years.
Even without accounting for taxes in his investment, he’ll come out ahead with the return of premium option. However, the comparison skews in the investment’s favour if you can get a higher return. You also have to consider that he only gets $6,300 in premiums returned if he doesn’t make a claim. Even if he makes a claim for one month for $5,000, he won’t get anything back at the end of the seven years.
So while the numbers may favour one scenario over the other, many factors affect the outcome. Your age, income tax bracket, and risk tolerance all play a role in your decision.
Which insurance company offers the ROP rider?
Out of all the insurance companies in Canada, five offer the ROP rider. These are Canada Life, iA Financial Group (Industrial Alliance), Desjardins, Humania, and La Capitale. Canada Life is the only one that offers a seven-year refund.
RBC Insurance, Canada’s largest disability insurance company by market share, is notably absent from this list.
Manulife, another big name in the disability insurance marketplace, has stopped selling it in 2022.
What other insurance policies have the ROP rider?
Besides long-term disability insurance, you will commonly find ROP riders on critical illness insurance policies. Critical illness insurance gives a lump sum payment if you’re diagnosed with a covered condition, like cancer, heart attack, and stroke.
Similar to disability insurance, the ROP rider for critical illness insurance only pays out if you don’t make a claim.
Although life insurance doesn’t have any return of premium riders, some permanent life policies let you build cash value tax-free. Because you can withdraw this cash value anytime, it acts like a more flexible version of ROP riders.
Lastly, a quick note about short-term disability insurance. Since you can’t buy short-term disability insurance in Canada, it doesn’t have the ROP rider.
Frequently Asked Questions
What is return of premium disability insurance?
Return of premium disability insurance is a type of long-term disability insurance with the return of premium rider. It allows you to get back part of the premiums paid if you make no or few claims.
What is a return of premium policy?
A return of premium policy has the ROP rider, allowing an insured to recover some of the costs of the policy.
How does return of premium rider work?
First, you have to buy the ROP rider when you get long-term disability insurance. After some time, if claims are minimal, the insurance company will refund half the premiums paid.
What type of insurance is used for a return of premium rider?
Besides disability insurance, critical illness insurance is the most common type of insurance that has these riders.
How the rider functions on critical illness insurance policies differs from disability insurance. For example, you can get a return of premium on death, which refunds premiums to your beneficiary if you die without making a claim. There’s also a return of premium on expiry (also called on cancellation or surrender), which pays you upon expiry of the policy.
Do You Need A Disability Insurance Policy With The ROP Rider?
Now that you know how the ROP rider works, is it something you want to add to your disability policy? You’ll want to weigh the benefits against the drawbacks of adding the rider. Also, don’t forget to compare it to using the money for an investment to see which comes out ahead.
If you want a free, no-obligation quote, contact us at info@briansoinsurance.com or 604-928-1628. We’ll find you the proper coverage with an ROP option that enhances your policy.
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While we make every effort to keep our site updated, please be aware that timely information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Brian So Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser. This post is a brief summary for indicative purposes only. It does not include all terms, conditions, limitations, exclusions, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details which can be provided upon request. In case of any discrepancy, the language in the actual policy documents will prevail. A.M. Best financial strength ratings displayed are not a warranty of a company’s financial strength and ability to meet its obligations to policyholders.
