The return-of-premium concept is showing up in a wide assortment of insurance products, either as an embedded feature or an optional rider.
It’s very trendy in term insurance right now, to the point that it already has a moniker–ROP term, for return-of-premium term insurance.
But ROP also shows up in universal life, variable universal life, annuities, long term care insurance, disability income insurance, and some cancer insurance policies. Some critical illness carriers are eyeballing it, too.
The concept is not new, but the current iteration and use in multiple product classes is. Advisors are asking, is ROP worth following and presenting to clients and, if so, what to know about it first?
ROPs generally provide that, if the policyowner does not use the coverage after a specified period, the owner can get the premiums back (or a certain percentage of those premiums back). Some allow the premiums to be paid back, less any claims already paid.
There is a cost for the feature, either built-in to the pricing or as a rider. Depending on contract details, the cost can be high, points out Raymond J. Ohlson, founder and president of The Ohlson Group, Indianapolis, Ind.
But as long as the coverage is right for the client and the client can afford the premium, “ROP is good to have,” he says.
For instance, if the client has some extra money to spend, beyond that for basic LTC, he says he “would rather the client apply that money to buy maximum benefits than the sizzle of ROP.”
But if the client has already selected rich benefits and still can afford ROP, he’d recommend the ROP.
This is not a “hot product,” he stresses. But with all the distrust in the marketplace today, he says, clients who can afford it “want the option that leaves one hand in the back door so they can walk away with their money if they want to.”
ROP appeals to people who are concerned about buying a product they think they probably will never need, points out James Glickman, president and chief executive officer, LifeCare Assurance Company, Woodland Hills, Calif.
ROP is not a reason to buy the insurance, Glickman stresses, “but it does provide a way for people to feel better about buying the coverage.”
In the term insurance market, ROP provides options, says Michael Hamilton, assistant vice president-term and mass affluent products at Lincoln Financial Group, Hartford.
With traditional level term insurance, he explains, the base policy has no value during the level premium period or when the contract expires. But with ROP attached, the term policyowner can surrender the contract and receive cash payback after a set period (typically the end of the base policy’s level term period).
Similarly, in fixed annuities, ROP “tracks with today’s increased focus on having guarantees and with the more conservative nature of the investing public,” says Jeremy Alexander, president of Beacon Research, Evanston, Ill. “Also, it makes FAs more competitive with variable annuities.”
The feature is not new in FAs, Alexander points out, but it is definitely getting more attention in the market. In his firm’s FA database, 62 policies have the feature built-in as a “guarantee of premium” (where the cost is factored into the policy pricing), and 6 others offer it as an extra-cost ROP rider.
In variable annuities, ROP started out as protection against market risk in the early 1980s, says Daniel Herr, assistant vice president-income product market development at Lincoln Financial Group, Philadelphia. The feature was tied to the guaranteed minimum death benefit, and beneficiaries collected the ROP.
But now VAs offer living benefits–for instance, the guaranteed minimum withdrawal benefit–as well as death benefits, and the ROP concept (if not the actual term) is part of those newer features. Because of that, he says, VA policyowners themselves can benefit from ROP, not just the beneficiaries.
The feature is so popular that living benefits are now included in the majority of new VA sales, he says, adding the appeal is “having something to walk away with.”
That can happen in LTC policies too, points out Barry Fisher, vice president and chief marketing officer of Republic Marketing Group, Inc., New Braunfels, Texas. Most LTC policies with ROP will return the premium upon death of the policyholder, he points out. But a new rider his firm is marketing (for LTC policies underwritten by Loyal American Life) allows policyholders themselves to get their money back any time before age 75.
Available to buyers through age 64, the rider vests the money-back amount from 0% in the first 3 policy years to 40% in year 4 on to 100% back in year 10+. At age 75, if the owner doesn’t take the ROP, all premiums paid up to that time will be added to the LTC pool of money.
“This appeals to people who feel they will not need LTC coverage but, if they do need it, would rather transfer the risk to the insurance company than invest for it themselves,” Fisher says. It enables them to get their money back or to extend their benefit pool.
Glickman points out that about 33% to 50% of companies in the standalone LTC market currently offer an ROP. But the feature appears on only 5%-10% of policies sold, so the feature is being used selectively, he says.
In the disability income market, ROP answers the “what if I never use it” question, says Chuck Eberle, president of American Insurnet Agency, Cincinnati. Depending on product design, the cost runs about 25% more than a DI without ROP. “That could be equivalent to a 14% return on your money, compared to paying the premium for the DI and having that money be gone forever,” he says.
The feature works well in markets where there is a lot of DI solicitation going on, Eberle adds. For instance, when DI was actively sold to doctors and other professionals some years back, a number of prospects said they did not think they would need the coverage. So agents presented the ROP, showing how the client could get the money back if a disability never occurred.
Universal life and variable universal life policies offer ROP, too, but the feature works differently than in the ROP term market, points out Naveed Irshad, vice president-product management at John Hancock Life Insurance Co., Boston.
The primary use here is for premium financing situations, he says. “The ROP amount is set to track the loan for money that is used to buy a life policy. Typically, the ROP is assigned to the loan company, and is part of the loan agreement.”
In his company’s product, the feature can be set up to pay 100% ROP on the sum of premiums paid, and also have interest growth on the ROP amount, ranging from 0% to 5% compounded. The flexibility is important because the premium loan arrangements vary quite a bit, says Irshad.
Because ROP works differently in different products and product classes, experts say advisors need to read the provisions carefully. Here are some tips:
Evaluate costs. In products that have cash value, such as annuities and UL, the ROP feature entails minimal or no cost, says Glickman. But in standalone LTC policies, the cost can run two times the cost of policies without the rider. The actual cost depends on policyowner age, benefit design, benefit period and other factors, he notes. Fisher says his ROP rider costs about 47% of the base premium for a 5-year benefit on someone age 57.
On an annuity, says Ohlson, the advisor needs to check whether the ROP is offered as an extra cost rider or is built into the pricing. “If it’s built-in, the annuity’s interest may not renew as well as with non-ROP contracts. There is no free lunch.”
In ROP term, the cost is high for short benefit periods (i.e., 5 years), say industry executives, but it generally reduces if a person selects a 30-year period.
Remember that “good and bad is relative,” advises Glickman. “If you are not earning anything on your money or if you are only earning 2%, then putting that money toward buying ROP may make sense.” The decision will be affected by many factors, he adds. These include whether the client needs access to the money, how much the payout is at what time in the product’s life, the length of the ROP period, the time value of money, and the implied return, among other factors.
Hamilton equates the cost issue to that of deciding whether to rent or buy a car: If clients are looking for the cheapest price, ROP is not appropriate, he says. “But if they are concerned about paying money for something for which they won’t get anything back, then ROP is appropriate.”
Run the cost/benefit: Like Ohlson, Glickman and Fisher believe consumers are better off putting extra money they may have into purchasing LTC policy features like inflation protection and lifetime benefits, to strengthen coverage. But if a client’s LTC is already loaded up and if the client is not sensitive to premium size, says Glickman, the ROP can be attractive for estate protection–”because you’re not wasting it (the money).”
Consider the nature of the sale. This impacts the ultimate value, points out Olson. For instance, if ROP on a LTC policy is sold in a corporate situation, such as for key person insurance, the corporation can deduct the premium from taxes, and “the ROP at death would be a strong extra benefit to the family.”
Determine who gets the ROP amount. As indicated earlier, in some contracts, the ROP goes to the beneficiaries once the insured dies. In other cases, the policyowner can take the ROP while still alive.
Check out how much is actually paid back. In DI insurance, for instance, ROP may pay 80% of premiums paid after 10 years, but some DIs may pay 50%, says Eberle. In LTC insurance, the ROP could be 100% of premiums (full nonforfeiture) or 100% of premiums less claims already paid up to time of death of the insured (limited nonforfeiture), says Fisher, adding, “Don’t mistake this for statutory nonforfeiture benefits that some states require.”
In UL and VUL insurance, the ROP amount could be 100% of premiums or all premiums plus compounded interest, says Irshad. In ROP term, the payout may be all premiums paid minus rider charges, policy fees, rider claims paid, and table ratings. If the owner cashes out early, many ROP term policies allow a proportionate payout.
What happens when the ROP term expires? In Fisher’s ROP rider for LTC, for instance, the person can opt to leave the ROP amount in the contract as an addition to the policy benefits. In ROP term policies, the money typically goes back to the owner.
Does the client pay taxes on the ROP amount? In ROP term, most carriers say the money is return of principal, so it goes to the client tax free.
But in UL and VUL cases where premium financing is involved, “there are complex implications” for ROP payouts, cautions Irshad. For instance, “you cannot take into account the increase in calculating the TEFRA and TAMRA premium, because the tax code does not allow that. And future premiums are uncertain, because these are flex-premium contracts, so an illustration may not pan out and the death benefit pattern may be unpredictable.” Still, he says the payout is considered a death benefit, and is treated as any normal death benefit in estate planning.
At Lincoln Financial, “we recommend that the client consult a tax advisor about whether the money back is tax free,” says Hamilton.
What is the target market like? Eberle notes that many DI sales today are to mid-market and blue-collar employees. “They come to you, asking for DI,” he says, “so they are likely expecting to use the coverage sometime.” As a result, they are less likely to want to buy ROP, he says. His suggestion is for agents to start soliciting people who don’t think they’ll ever need DI. They will be receptive to the ROP message, that “it’s a way to get your money back if you don’t need the coverage,” he predicts.
In ROP term, the ideal client is looking for 20 to 30 years of coverage and willing to commit for that premium, says Hamilton.
Look for simplicity. “For these features to go anywhere with baby boomers, they have to be simplified,” contends Fisher. For boomers, he explains, “it’s all about me…so why not offer them a product where they can get their money back” without complexity?