Why is term insurance so inexpensive even with the recent rate increases by many carriers? Because only in rare cases does the death benefit ever pay out.
Statistics whispered throughout the industry say that less than 1% of term policies actually pay a death benefit. The other policies either lapse or are replaced with new coverage every few years.
But consumers want something of value, and if value is defined as “throwaway term” to protect against death for a limited period of time, then inexpensive term may be the answer.
And it’s always better to have some coverage than no coverage.
To achieve this goal, what about using a term contract that has a built-in savings plan that is guaranteed to pay out an annual return of 5.499% after 20 years? Doesn’t that sound enticing, especially to consumers in today’s economic environment?
But how can term provide a return of almost 5.5%? The answer is return of premium (ROP) term.
Currently, there are only a few insurance companies that have reasonably priced ROP term. But they exist and are worth considering for use in the current environment.
Here is the situation. Today’s small ROP term market is due to Actuarial Guideline CCC (officially, Actuarial Guideline 45). This guideline applies to individual life insurance products that offer endowment benefits (think ROP term) prior to the expiry date of the life insurance. It does not apply to universal life or variable life insurance.
So now, for the first time, clear nonforfeiture standards exist.
These standards generally increase the cash values that must be provided within the ROP term contracts at earlier durations. But since Actuarial Guideline CCC is effective for all forms filed on and after January 1, 2009 and for all policies issued on and after January 1, 2010, some insurance companies currently have a competitive advantage–if they are using an older policy form.
This competitive advantage goes away, however, starting January 1, 2010. At that time, all life insurers will effectively be on a level playing field, and they will increase ROP term premiums for consumers.
Many carriers have already exited the marketplace or priced themselves out of the marketplace. But as noted earlier, some competitively priced ROP term is still available today.
These policies offer a tremendous consumer value. For an example, look at the accompanying charts. They show some key competitors in a very small ROP marketplace. All companies listed are rated at least A- by A.M. Best. The premiums are for a 45-year-old male, rated best nonsmoker, who wants a ROP with a $1 million face amount, for either 30 or 20 years.
The charts should make it clear that, for consumers who need death benefit coverage and are more than willing to buy a term policy, now is the opportunity to show a higher premium but with all premiums guaranteed to be refunded after a period of time (depending on contract).
The “excess” premium paid over the base term premium can almost be viewed as a deferred savings account. Since this is not as liquid as a regular savings account, the return should be, and is, higher than other savings vehicles available today.
What do advisors accomplish by using a ROP term strategy in today’s market?
o They move the discussion away from finding the absolute lowest cost term contract to focusing on the value a term policy can provide.
o They provide the customer with more flexibility down the road, since there is a cash value buildup that the customer can access before the 20-year point (albeit with a much lower return potential).
o They are able to show real value to the coverage that is purchased, so the consumer will not be looking at the product as a pure expense.
Sure, everyone wants to think about offering low cost. But shouldn’t the main focus be on showing contracts that provide real “value” to the consumer? ROP term isn’t the right sale for everyone but it should be a valuable option the advisor can offer in a variety of cases.
He is a registered representative and investment advisor representative for ING Financial Partners, Inc. His e-mail address is: [email protected]