Question

A term life policy has the return of premium (ROP) rider. All of the following are true EXCEPT:

A: The rider greatly increases the premium of the policy.
B: The ROP rider is optional for the insured to add at application.
C: When a 30 year term policy expires with the ROP rider added, the returned money is devalued by inflation.
D: The returned premium is income and fully taxable.

Answer 1

The returned premium on a term life policy with a return of premium (ROP) rider is not considered income and is not taxable. However, any interest earned on the refunded premium may be subject to taxation.

Step-by-step explanation:

The correct answer is D: The returned premium is income and fully taxable. With a return of premium (ROP) rider on a term life policy, the insurance company refunds the total premiums paid by the policyholder if they outlive the policy term. The refunded premium is not considered income and is not taxable. It is a return of the policyholder's own money.

However, it is important to note that any interest earned on the refunded premium may be subject to taxation.

For example, if a policyholder paid $10,000 in premiums over a 20-year term and outlived the policy, the insurance company would refund the $10,000 premium at the end of the term. This refund would not be considered income and would not be taxable.