The television game show Deal or No Deal is an example of how a simple game can become interesting to millions of viewers. It offers no hard-hitting questions to answer and no complex puzzles to solve. The players simply pick a number and see if they win some cash.
Return of premium term (ROP Term) life insurance products are similarly simple. This has led to their popularity. If the customer pays all of the required premiums over a specific time period, the person can then receive all of his or her money back.
There are no complicated credited interest rate formulas or surrender charges to calculate. It’s just a simple return of all the premium already paid in.
However, debate is growing about whether the product is a good deal for the consumer. People considering ROP term products should ask themselves if the policy is a deal or not.
ROP term products are similar from company to company, because all must comply with the Standard Nonforfeiture Law. Most companies do not allow any portion of the cumulative premium to be returned in the first five years, after which point the percentage of premium returned increases gradually until the last 5 to 10 years of the level premium period, when the percentage increases at a faster rate.
A typical 30-year ROP term product may return 20% in year 10, 30% in year 20, 60% in year 25, and 100% in year 30.
Recently, companies have begun offering, through an additional rider, the option to increase the earlier percentages of premium returned. This enhanced rider may return a percentage of premiums on a 30-year ROP term product of 60% in year 15, 70% in year 20, 80% in year 25, and 100% in year 30.
One way to measure if the ROP Term product is a good deal for the consumer is to calculate a rate of return on the additional premium that is paid for the ROP feature. Essentially, the ROP rider premium is the investment, and the total premium returned–which includes the base term premium–is the return on the investment.