Return of premium (ROP) term products have had excellent success in key markets in recent years. This article examines the roots of this success and identifies both new market applications and potential product enhancements (and issues).
In its simplest construction, ROP offerings consist of a base term policy, generally of 15, 20, or 30 years’ duration. During this period, the premiums are paid on a level basis, with the premium level either guaranteed or sold on a current basis.
An ROP rider then provides for the return of all policy premiums if the policy is held until the end of the stated level term period. (Note: For technical reasons, the base term policies typically allow for the payment of an annual renewable type term premium if the policyholder wants to continue coverage after the level term period ends.)
The ROP rider also generally provides for payment of a reduced percentage of all premiums, if the policy lapses before the end of the level term period.
Such riders are attractive for buyers who expect to continue coverage for the long term. If the cost of ROP term insurance is $1,000 a year, then at the end of 30 years, the owner will get a check for $30,000–income tax free (because there is no contract gain).
Obviously there is a cost to the coverage, and the incremental cost of the ROP component varies significantly by length of level term period.
These policies have been sold on a sophisticated simplified underwriting basis to individuals in middle income markets, especially to those who have taken out mortgages on their homes within some recent period of time. This market link provides for some market self-selection (why take out a mortgage if one’s health is seriously impaired?)
The market is huge, although the industry has yet to see the impact of a correcting housing market on sales of ROP policies.