Before seeing return-of-premium (ROP) term life insurance two years ago, Jay Taussig, a financial advisor in Denver, Colo., didnt want anything to do with selling term insurance.
Today, though, roughly 50% of his life insurance business is in ROP term policies. (His total life production represents approximately 20% of his total business.)
Meanwhile, term insurance companies who offer ROP features in their products say the ROPs are selling briskly.
For example, Fidelity & Guaranty Life, Baltimore, Md., has been offering a mortgage term life policy with a ROP rider since 1999 and a brokerage term product with ROP since 2001. Today, term with ROP sales represent two-thirds of all newly issued level term policies, says John Phelps, vice president-brokerage life sales. The companys total term sales last year, including the ROP, were over $60 million.
Similarly, AIG American General, Houston, has seen swift sales since it started marketing a level term product with built-in ROP in late 2002. “In fact, were expecting 15% of our total term sales will be in this product by year-end 2003,” says Douglas Israel, senior vice president-product management. This should be a substantial amount, he adds, since AIGs total term sales were $105 million in 2002 and they are up this year, too.
Just what is return of premium term life insurance, and why is it starting to catch on with buyers and producers?
ROP is level term insurance that has a feature promising the policyholder can get back all premiums paid into the policy when the level term period expirestypically, in 15, 20 or 30 years.
Some ROP designs also let the owner get a pro rata portion of their premium back before the policy term ends, sometimes as early as year six, says Eloise Glaspie. She is life marketing specialist at CMIC, an insurance brokerage in Overland Park, Kan., that currently works with ROP products of three insurers.
Depending on design, the feature is offered as a policy rider, built-in provision or promise made in a letter of understanding accompanying the contract.
[Note: At least one companyOhio National Financial Services, Cincinnatioffers a ROP variation. This is a 10-year level term policy with a "recapture provision." It lets owners "recapture" all premiums paid into the term policy if the owner converts the policy to an Ohio National permanent life policy within the first five policy years.]
Typically, the ROP guarantee is backed by the issuing company. Companies dont reinsure it separately.
The ROP market is very small–only eight to 10 insurers reportedly offer the feature right now. But word on the street is, other insurers are considering market entry.
Usually, the insurer charges an extra cost for the ROP feature, says Glaspie. If the feature is offered as a policy provision, the carrier factors the extra cost into the term policy pricing.
That “extra cost” is a sticking point for some producers. They want level term insurance to be their low cost option, so they sniff at the ROP because it adds to the cost.
But those in the market find the cost issue is negligible, especially on longer-term contracts. Observes Jeffrey Mooers, president of H.D. Mooers & Company, Lafayette, Calif.: “If premium drives term sales, then a premium of zero dollars should drive this product.”
The ROP cost on 30-year level term plans is often so low as to be of little importance to clients, especially since the customer can get the premiums back at the end of the term, Mooers explains. The feature works well “in the mortgage protection market, buy-sell situations, key-man cases, and any situation where the client has a known long-term need and is likely to keep the policy for the full period,” he says.
The problem for ROP marketers right now, says Glaspie of CMIC, is that “agents and clients dont yet know or understand ROP. Agents need to be educated on the fact that the client gets the money backand its free of taxes, because it is a simple return of principal.”
One strategy that works, she says, is to ask the client: “Do you want low-cost term or no-cost term?” Most people will choose the latter option, she says. When they do, the producer can then show the client how the ROPs extra cost buys the client a money-back guaranteeresulting in what amounts to no-cost term.
If the insured dies before the ROP feature is exercised, the policy death benefit goes to the beneficiary. If the owner lapses the policy before the ROP trigger point, no premium goes to the owner.
This is not the lowest cost term insurance, Glaspie agrees. But, in view of what the policyholder gets, it often comes out to be the more desirable choice, she says.
To illustrate, she points to a sample case where a 30-year-old male non-tobacco user in the best rate class wants $250,000 30-year level term insurance. This man would pay about $360 for the 30-year plan with ROPor $275 for a 30-year level term policy with out ROP (see chart).
This is a great opportunity for the policyholder to win, contends Glaspie. “The man doesnt have to die to win. He gets his money back.”
“It is not return on your money, but you do get your money back, and people like that,” adds Israel of AIG. He sees the product as having strong appeal to people who want the cash values associated with permanent insurance as well as the lower cost of term. The AIG product has guaranteed cash values. Its ROP benefit is paid net of substandard and rider charges.
Agents who sell ROP plans win, too, points out Phelps, of Fidelity & Guaranty Life. “The agent gets to offer a differentiated producta level term policy with greater value than traditional level term insurance. The agent gets a commission on the rider, too.”
This is “a no-brainer” for the agent, he maintains.
To help clients see the value, agents can point out what the client would have to earn in another investment to get as much value as the rider offers, Phelps says.
“For example, assume a 35-year-old male nonsmoker, rated preferred. This man would pay $428 a year for a 30-year level term plan at our company. The ROP rider would add $102 per year to that cost. At the end of the 30-year period, the man could get $15,900 as the ROP amount. To get that kind of return elsewhere, the man would have to invest $102 a month for 30 years in an instrument yielding 9.22 percent net after tax, guaranteed.”
“Think of it as forced savings, if you live, and as an exponentially rewarding investment to your heirs if you die,” says Taussig.
Some people, when they see the cost differential, say, “Wait a minute. You mean Ill get my money back at the end of the period if I pay that extra amount?” says Gregory P. Mortensen, who has been training agents on ROP for over a year and who is now associated with Source Brokerage Inc., Indianapolis, Ind.
When they look at the numbers, Mortensen continues, “many clients then say, Gee, I think I can find an extra $30 a month (or whatever the price differential is).”
Taussig says he always shows the policy against a “bare-bones” level term policy, so clients can see the difference on their own. “Most end up going for the ROP.”
Its easy to see why they choose the ROP, he says. “Why give your money away to the insurance company, especially if you think youll live for the full period? And its nice to think of getting that lump sum later on.”
Besides, “it doesnt take rocket science to figure out how the contracts work,” says Taussig.
The coverage is good for all term buyers, whether in their 20s, 30s, 40s or 50s, he adds. “But I probably wouldnt offer it to someone over age 60 because they would not receive their lump sum until age 90 (on a 30-year plan). Nor would I offer it to someone who needs life insurance for an irrevocable life insurance trustthey need permanent insurance for that.”
At Ohio National, the 10-year term policy having the recapture feature, mentioned above, is actually an enhanced conversion credit, says Carol Nightengale, vice president-marketing support. “Its a bridge product for those who want a permanent product but dont have the money now.”
The purpose is to support conversion, not to compete with other ROP products, notes Shawn Hartnett, life product officer at Ohio National. As term companies have become more price competitive in recent years, they have been converting fewer policies to permanent, he explains. “This is a way to take the strength in term market sales and then bring the permanent numbers back up.”
Traditional conversion plans usually credit only the last year of term premium to the converted policynot up to five years of term premium.
“There is a cost for the recap feature, but it is a nominal amount in comparison to our comparable term policy without the feature,” says Hartnett. The recap plan debuted in April 2003, he adds, but the company already has written cases. Average age of paid buyers to date is under 40.
Even with the early success stories, some companies are bypassing the ROP market. “We looked at it, but we didnt see a lot of interest from our agents,” says Frank Karkut, corporate vice president and product manger-individual term and whole life at New York Life, NYC.
“Besides, we believe the agent can replicate it with a universal life policy and have more flexibility, too. That way, you wont just have it for 20 years and then youre out.”
Besides, New York Lifes term products do not run longer than 10 years, he says. And the company prefers to focus on converting term to permanent policies. Still, Karkut says, “we will continue to look at the market and see what happens.”
Reproduced from National Underwriter Life & Health/Financial Services Edition, July 21, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.