Return of Premium on Disability Insurance Policies

Is a Return of Premium (ROP) Rider Worth It?

Disability is expensive enough – why add return of premium?

Return of premium riderFor many people who are self-employed or who don’t have employer sponsored group disability coverage, buying a personal disability insurance policy is a must. This seems like a no-brainer, but most people are surprised at the cost of disability insurance when they purchase it privately.

Yes, disability insurance is more expensive than life insurance. Significantly more! Simply put, the chances of claiming a disability insurance policy for at least one period of long term disability in your working career are about 50%. That means one in two working Canadians will experience at least one period of disability, due to injury or illness, which keeps them off work for 90 days or more. And, if you’re off work for more than 90 days the average amount of time spent on disability claim is 2.9 years! Wow!

The #1 need is income protection

In this article we will discuss the cost/benefit analysis of having a return of premium rider on your disability insurance policy. That being said, the most important thing when buying disability insurance is to have enough income protection in place to ensure that your lifestyle and monthly bills are covered. After that we can look towards building value into a plan with pseudo-equity component which is the ROP rider.

You should never decide not to get disability insurance based on the cost of the ROP rider. This should always be considered an extra feature for those with more than enough disposable income to afford the option. Get income protection first – add value features after.

Is a Return of Premium Rider worth the cost?

There are two main insurance companies that offer a good return of premium rider on their disability insurance policies – Canada Life and Manulife. These riders are very similar. With Canada Life you can get back 50% of all your premiums once every 7 years. With Manulife you can get back 50% or 60% of your premiums once every 8 years.

The rules are simple. You must pay all your premiums over the time period. Secondly, if you have had any claims, the amount of your claim will be deducted from your return of premium amount before payout. So, if you have had a period of long-term claim it is most likely you will no longer qualify for a return of premium payment.

ROP rider on disability insurance is like having “insurance on your insurance”. In case you never get sick and never have a claim a portion of your total premiums will be returned to you, tax free. So, if you never get sick or hurt, and never make a claim, your actual cost for insurance goes down – by a lot!

If you do have a claim then the reality is you paid more for your disability insurance than another person with exactly the same coverage and no ROP rider. So, is it worth it?

ROP Rider Analysis

With just over 50% of Canadian workers NEVER having a long-term disability, then chances are slightly in your favour you will not make a claim (but still the risk is too high not to have disability insurance protection). Let’s take a look at two examples from Manulife’s 60% ROP option (the most expensive rider).

If our client is a 40 year old man, non-smoker with $6,000 of disability insurance, and assuming he is in an office job (class 3A occupation to determine disability insurance costs), his basic premium for a top of the line, professional insurance policy (Proguard from Manulife) would cost $238.41 per month.

If this same man was to take the ROP rider as an option, his premium would increase to $369.54 per month. The rider costs an additional $131.13 per month. No, let’s assume he never has a disability claim during his working career. In this case he would get back $20,530 after every 8 years. His premiums would therefore be reduced by 60%. His actual net premium payable is $155.69 per month. This is a significant decrease over the base premium of $238.41.

Now, let’s assume he did have one period of long term disability, wiping out one of his $20,530 premium returns over the course of him owning this policy. He will still receive back a total of $43,626. His total premium expenditure would be $106,428 (assuming a 2 year disability period where premiums were waived). His net premiums payable are $201.29 per month over a 24 year period. Still a discount!

ROP on Disability Insurance Worthwhile – If you can afford it

For those who have the financial resources to afford this rider, if can be a strong return on investment and protection for your long-term premiums in case you never get sick. I do suggest you invest your money firstly into RRSPs and a TFSA, as these long-term investments allow for tax-sheltered growth of funds and retirement income. Once you are maximizing these investments, you can build in a ROP rider onto your disability insurance policy to create some real value out of disability insurance – which has traditionally been a pure cost insurance policy.

Contact Life Guard Insurance today for a free, no obligation quote and analysis of your disability insurance needs and see whether or not a return of premium rider would be a wise invest for you.