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.