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.
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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.