Return Of Premium Rider

Return-of-premium term insurance:

1. A.Builds large cash value like whole lifeConfuses a premium refund at the end of the term with genuine cash-value accumulation. Return-of-premium coverage costs more and repays premiums to a surviving insured, but it is still term insurance; any interim surrender value follows a limited schedule rather than the growing account of a whole life policy.
2. B.Never expiresReads the refund feature as permanence. Return-of-premium coverage is term insurance with a defined level period, and the refund happens precisely because that period ends with the insured still living.
3. C.Pays double at deathDescribes an accidental death benefit rider, not the return-of-premium feature. The refund is paid to the living policyowner when the term expires; it does not change what a beneficiary receives if the insured dies.
4. D.Refunds premiums if the insured outlives the termCorrect - premiums returned at term end if alive.

Why: ROP term refunds the premiums paid if the insured survives the level term period.

A 20-year term policy includes a RETURN OF PREMIUM rider. If the insured survives the full term, the refunded premiums are:

1. A.Taxed as ordinary income in the year receivedWrong-but-tempting. Only amounts EXCEEDING basis would be taxable - and ROP returns exactly the basis.
2. B.Taxed as a long-term capital gainWrong. No gain arises from recovering one's own premiums.
3. C.Received income-tax-free as a return of the owner's basisCorrect. Getting your own premiums back is not income.
4. D.Forfeited unless reinvested in a new policyWrong. The refund is unconditional at term's end.

Why: The return-of-premium benefit repays the premiums paid, which constitutes a nontaxable return of the owner's investment; the trade-off is a significantly higher premium than plain term. Citation: IRC basis-recovery principles; ROP rider design. Takeaway: ROP payout = basis back, no tax - purchased with higher premiums.