Return-Of-Premium Showing Up In All Lines

In the disability income market, ROP answers the "what if I never use it" question, says Chuck Eberle, president of American Insurnet Agency, Cincinnati. Depending on product design, the cost runs about 25% more than a DI without ROP. "That could be equivalent to a 14% return on your money, compared to paying the premium for the DI and having that money be gone forever," he says.

The feature works well in markets where there is a lot of DI solicitation going on, Eberle adds. For instance, when DI was actively sold to doctors and other professionals some years back, a number of prospects said they did not think they would need the coverage. So agents presented the ROP, showing how the client could get the money back if a disability never occurred.

Universal life and variable universal life policies offer ROP, too, but the feature works differently than in the ROP term market, points out Naveed Irshad, vice president-product management at John Hancock Life Insurance Co., Boston.

The primary use here is for premium financing situations, he says. "The ROP amount is set to track the loan for money that is used to buy a life policy. Typically, the ROP is assigned to the loan company, and is part of the loan agreement."

In his company's product, the feature can be set up to pay 100% ROP on the sum of premiums paid, and also have interest growth on the ROP amount, ranging from 0% to 5% compounded. The flexibility is important because the premium loan arrangements vary quite a bit, says Irshad.

Because ROP works differently in different products and product classes, experts say advisors need to read the provisions carefully. Here are some tips:

Evaluate costs. In products that have cash value, such as annuities and UL, the ROP feature entails minimal or no cost, says Glickman. But in standalone LTC policies, the cost can run two times the cost of policies without the rider. The actual cost depends on policyowner age, benefit design, benefit period and other factors, he notes. Fisher says his ROP rider costs about 47% of the base premium for a 5-year benefit on someone age 57.

On an annuity, says Ohlson, the advisor needs to check whether the ROP is offered as an extra cost rider or is built into the pricing. "If it's built-in, the annuity's interest may not renew as well as with non-ROP contracts. There is no free lunch."

In ROP term, the cost is high for short benefit periods (i.e., 5 years), say industry executives, but it generally reduces if a person selects a 30-year period.

Remember that "good and bad is relative," advises Glickman. "If you are not earning anything on your money or if you are only earning 2%, then putting that money toward buying ROP may make sense." The decision will be affected by many factors, he adds. These include whether the client needs access to the money, how much the payout is at what time in the product's life, the length of the ROP period, the time value of money, and the implied return, among other factors.

Hamilton equates the cost issue to that of deciding whether to rent or buy a car: If clients are looking for the cheapest price, ROP is not appropriate, he says. "But if they are concerned about paying money for something for which they won't get anything back, then ROP is appropriate."

Run the cost/benefit: Like Ohlson, Glickman and Fisher believe consumers are better off putting extra money they may have into purchasing LTC policy features like inflation protection and lifetime benefits, to strengthen coverage. But if a client's LTC is already loaded up and if the client is not sensitive to premium size, says Glickman, the ROP can be attractive for estate protection–"because you're not wasting it (the money)."

Consider the nature of the sale. This impacts the ultimate value, points out Olson. For instance, if ROP on a LTC policy is sold in a corporate situation, such as for key person insurance, the corporation can deduct the premium from taxes, and "the ROP at death would be a strong extra benefit to the family."

Determine who gets the ROP amount. As indicated earlier, in some contracts, the ROP goes to the beneficiaries once the insured dies. In other cases, the policyowner can take the ROP while still alive.

Check out how much is actually paid back. In DI insurance, for instance, ROP may pay 80% of premiums paid after 10 years, but some DIs may pay 50%, says Eberle. In LTC insurance, the ROP could be 100% of premiums (full nonforfeiture) or 100% of premiums less claims already paid up to time of death of the insured (limited nonforfeiture), says Fisher, adding, "Don't mistake this for statutory nonforfeiture benefits that some states require."

In UL and VUL insurance, the ROP amount could be 100% of premiums or all premiums plus compounded interest, says Irshad. In ROP term, the payout may be all premiums paid minus rider charges, policy fees, rider claims paid, and table ratings. If the owner cashes out early, many ROP term policies allow a proportionate payout.

What happens when the ROP term expires? In Fisher's ROP rider for LTC, for instance, the person can opt to leave the ROP amount in the contract as an addition to the policy benefits. In ROP term policies, the money typically goes back to the owner.

Does the client pay taxes on the ROP amount? In ROP term, most carriers say the money is return of principal, so it goes to the client tax free.

But in UL and VUL cases where premium financing is involved, "there are complex implications" for ROP payouts, cautions Irshad. For instance, "you cannot take into account the increase in calculating the TEFRA and TAMRA premium, because the tax code does not allow that. And future premiums are uncertain, because these are flex-premium contracts, so an illustration may not pan out and the death benefit pattern may be unpredictable." Still, he says the payout is considered a death benefit, and is treated as any normal death benefit in estate planning.

At Lincoln Financial, "we recommend that the client consult a tax advisor about whether the money back is tax free," says Hamilton.

What is the target market like? Eberle notes that many DI sales today are to mid-market and blue-collar employees. "They come to you, asking for DI," he says, "so they are likely expecting to use the coverage sometime." As a result, they are less likely to want to buy ROP, he says. His suggestion is for agents to start soliciting people who don't think they'll ever need DI. They will be receptive to the ROP message, that "it's a way to get your money back if you don't need the coverage," he predicts.

In ROP term, the ideal client is looking for 20 to 30 years of coverage and willing to commit for that premium, says Hamilton.

Look for simplicity. "For these features to go anywhere with baby boomers, they have to be simplified," contends Fisher. For boomers, he explains, "it's all about me…so why not offer them a product where they can get their money back" without complexity?