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Return-Of-Premium Term: A Great ROP-portunity

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Total term premiums collected increased from 2005 to 2006, according to the 2006 U.S. Individual Life Insurance Sales report from LIMRA International, Windsor, Conn.

How can this be, considering that overall term rates continue to decrease each year and term sales have been relatively flat? Did traditional term really sell that much more to get that premium?

The answer is return of premium (ROP) term life insurance.

Everyone has heard of ROP, but now more companies are seeing it as a requirement to stay competitive in the term market.

ROP has a higher premium associated with it compared to traditional term products, but its increasing popularity is certainly a reason for the rise in total term premium collected.

Most companies that have an ROP rider sell it on at least 15% of their term policies. Some companies that market the rider heavily sell it on more than 50% of their term policies.

So, having ROP keeps a company and a producer even with the competition. Given the market today, not having it is probably a disadvantage.

Why are some companies not selling it? Some are concerned that ROP term will reduce their current sales of universal life or whole life products.

However, more companies are becoming comfortable with the ROP rider than in previous years. Within the last 3 years, for instance, we have noticed that the number of insurers offering ROP term has more than tripled.

For the selling agent, ROP offers an easy sales pitch: “Get a money-back guarantee with your life insurance if you survive to the end of the level premium periods.

“Not only do you obtain death benefit protection, but you also get the flexibility of converting the policy to a permanent product, and the added bonus of cash value availability.

“If you decide you do not want the policy, then you get some or all of your money back, depending on how long you kept the policy in force.”

ROP has much opportunity for growth. One potential avenue is the underserved middle market. This market is known to be budget- and time-sensitive. So, if the price of life insurance is no more than that of the average cable bill, this market may not mind. And, although many mid-market applicants may not be particularly concerned with whether the policy is underwritten, the distribution channels serving this market typically want policies issued as quickly as possible; waiting 6-8 weeks for delivery of an underwritten policy is not their cup of tea.

One approach to serving this market has been for companies to offer simplified issued products through different distribution channels. This offers quick-issue times and no time-consuming underwriting, but the product has higher premiums. That raises pricing concern, potential for high lapses and higher mortality due to some anti-selection.

Now enter the ROP term product. These policies reduce both mid-market concerns, because the ROP rider generally improves lapse rates and the cost of the rider reduces the mortality anti-selection.

The chart shows that a fully underwritten ROP term product has a premium level similar to a simplified issue term policy with no ROP. The example involves a $100,000 insurance policy. It shows the 20-year term premium rates on the best 2 nonsmoker classes available for ROP term compared to rates for simplified issue term with no ROP rider.

If applicants believe they are in good health, then going through underwriting should not be a problem. As for price, even a $310 annual premium converts to less than $30 a month. Whose cable bill is that low and guarantees a return of premium upon cancellation?

This is why ROP term could be a valuable product for this underserved market.

Another option is to offer a simplified issue ROP term product. The key here is for the issuing company to get comfortable writing cases with mortality based on Medical Information Bureau reports, tele-underwriting and prescription drug databases.

That said, fully underwritten products are more justifiable from an underwriting expense standpoint–and easier on the applicant’s pocketbook–because of the higher premium charges for ROP term products.

Those thinking of offering ROP term in the future will need to be cautious of potential pricing issues. The product is sensitive to lapse rates and may require jumping through hoops to gain approval in certain states. Reserves will be higher than traditional term. But all these issues are manageable, and are well-defined through the experiences of other companies.

Standards do need to be met as far as product features are concerned, but many ROP products offer better returns than current thin margins on traditional term. ROP can offer a chance to increase sales and generate potentially higher margins for the portfolio.

The bottom line on ROP is that clients want it, more companies are offering it, and many agents are selling it. It is a great ROP-portunity for everyone.