Return of premium term has been gaining popularity as a mainstream life-insurance product. More companies sell this type of product to the general market rather than confining it to the mortgage-term arena, where it has existed for many years.
ROP term is generally more expensive than traditional term insurance, but less expensive than various forms of permanent insurance. It benefits from lower premiums than many forms of life insurance, with the added bonus of a cash value available during the level-premium period and a full return of premium at the end of that period.
Most industry professionals are familiar with the basic structure of a ROP term product. During the level-premium period, but before the end, the cash value available will grow as a percentage of total premium paid. Generally no benefit is paid in the first few years. A gradual increasing percentage of premium is paid until 100% is paid at the end of the level-premium period.
It is during the interim time frame that a ROP term product may change.
With ROP term gaining popularity, the Interstate Insurance Product Regulation Commission (Interstate Compact) began to set up filing guidelines to assist in expediting approval of this type of product.
The 31 states participating in the Interstate Compact (as of July 1, 2008) agree on the required guidelines for approving any product filing. The group setting up the ROP guidelines has been meeting throughout 2008, and has come to their initial recommendation.
The recommendation involves some interpretation of the non-forfeiture law, and this is where the change lies.
This interpretation has evolved into an actuarial guideline (AG CCC) that was posted as of June 11, 2008, on http://www.naic.org/documents/committees_lhatf_AG-ccc.doc. The guideline is open for comment through July 15, 2008.
Some regulators believe the guideline is necessary to create more of an equal playing field in the market. Some feel there are potential abuses in the current methodology that are not allowing some product designs to be as competitive as others, with only an interpretation of the non-forfeiture law being the main driver of the difference.
The guideline outlines a few key assumptions that try to create a perceived “equitable playing field.”
Products in the ROP market tend to fall into 1 of 2 designs–an integrated ROP benefit with a traditional term product or the return of premium benefit as a rider chosen by the insured.
The purpose of the guidelines is to treat these 2 designs exactly the same. Also, products with any non-guaranteed elements, such as current and guaranteed premium scales, will have minimum non-forfeiture values based on the scale that produces the higher cash values between the current and the guaranteed scale.
The biggest potential impact of the AG CCC is a change in how to calculate the minimum ROP amount paid during the level-premium period.
Minimum values can increase or decrease depending on the duration the policy is in. Higher interim cash values could be required to be paid to those policyholders lapsing before the end of the level-premium period.
For example, see Graph 1 for a 20-year ROP and Graph 2 for a 30-year ROP. The mid-section of each graph shows that the new AG CCC tends to increase the minimum amount paid in this example. Please note that results will vary by each product’s current ROP return amounts in the market. These changes in cash values could translate to the need to raise premiums in the market.
The exposure draft indicates that new product filings will be required to comply with this guideline as of the beginning of the 2009, and currently sold products will have to comply within a few years of the AG CCC effective date, currently projected to be January 1, 2012.
It is unclear when and if this guideline will be approved. It is moving forward, however, so companies currently selling or currently developing ROP term products need to be aware of this pending regulation and begin to understand the impact it will have on their products.
Early indications are that premiums could increase because of this proposal, so agents selling this product should watch for any new product releases and be prepared for the change in premium.