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.
Those that believe the ROP Term product to be a good deal say that the evidence is a guaranteed rate of return to the policy owner of 4% to 8% at the end of 30 years. Those who disagree point to the negative returns in the first 20 years. However, this “no deal” crowd should be aware that low early returns are also found in permanent insurance products like whole life and universal life.
The accompanying chart compares the rate of return for a 30-year ROP Term product, an enhanced ROP Term rider, and a UL product, all from the same insurance company.
Certainly the UL product will compare favorably after the 30-year period, because of the policy’s continued increase in cash values and its ability to allow the owner to continue to pay level premiums. However, the chart also shows that the ROP Term product, which in this example is fully guaranteed, has a higher return than the UL in years 25-30.
The 30-year term product policy owner may be further buoyed by an option to return 100% of the ROP Rider premium in year 15 or 100% of the total premium in year 30.
This new marketing option does not change the rate of return very much, but it does simplify the offer at the time of the sale. The policy owner can then make the decision to buy the ROP Rider premium with the knowledge that he or she can opt to receive all of the ROP Rider premium in 15 years or wait to receive the total premium in 30 years.
The ROP feature should also be considered relative to other types of products. For instance, this marketing concept works equally well with whole life or fixed premium UL insurance products, in addition to term insurance products. A typical whole life product for a 35-year-old male may offer cash values on a current basis that are 100% of the cumulative paid premium in year 15, double the premium in year 30, and triple the premium in year 45. This may be especially useful for the senior whole life product that is sold in a less sophisticated marketplace.
Is ROP a deal or not? As with other products, that depends on the situation. But clearly there are plenty of customers that have already said “yes” to the deal.