Despite the fact that term life insurance rates have continued to decrease, total term premiums collected did increase from 2005 to 2006, according to LIMRA International — and one product that has helped drive this overall increase is return of premium term. Although a relatively new innovation in the United States, ROP term has caught on quickly. And today, there are now roughly 20 ROP term carriers throughout the country.
ROP term premiums tend to cost less than traditional level term life and permanent life. In addition to the consumer-friendly price, the product has a guaranteed premium refund. In other words, if a policyholder outlives the ROP term level premium period and the policy is still inforce, they will receive a complete refund of the eligible cumulative premiums paid (minus any withdrawals or policy loans), federal income tax-free. In essence, the policyholder is rewarded for outliving the level premium period.
Filling the gap between term and permanent
Traditional term life is largely known for its affordability. Clients who can’t afford or don’t want permanent insurance often turn to traditional term insurance as a temporary solution. But for those who can afford to pay more than the regular term premium, ROP term may be a good solution given its death protection for a selected period and its premium refund feature.
Some carriers also allow policyholders to access a portion of their premium dollars before the term period ends. As far as price and benefits go, ROP term can fill the gap between term and permanent life insurance, especially for the untapped middle market, which, though it does get press, doesn’t generate much activity on the producer’s end.
Rate of return
A good way to look at the ROP term benefit is to calculate the rate of return that would need to be earned on the annual premium difference between a level term policy and an ROP term policy.
Let’s look at a hypothetical example with one carrier. If a 35-year-old female with a preferred rating who doesn’t use tobacco purchases from a carrier a 30-year ROP term policy with a $1 million death benefit, the annual premium would be $1,455 instead of $895 for a traditional 30-year level term policy offered by the same carrier.
On the difference of $560, she would have to earn 5.6 percent after tax on an investment each year to have the same $43,650 as the ROP term benefit amount. In a 28 percent tax bracket, that would equate a 7.8 percent return. (These numbers will change based on the client’s age, sex, rating classification, and chosen riders.)
5 potential markets for ROP term
As with any insurance product or service, ROP term is not necessarily for everybody. Here, however, are five situations in which term may work best.
1. 30 years of shelter and protection with a house and money at the end. Despite the current headlines declaring a credit squeeze, people are still signing 30-year mortgages. ROP term’s death benefit proceeds can help protect such a mortgage if the family’s wage earner dies prematurely.
Should the insured survive the level term period, however, the federal income tax-free premium refund provides additional assets that can fund everything from medical care to vacations.
2. Money for college. For young couples planning to have children soon, a 20-year ROP term policy can offer death protection and also help them plan ahead for college funding. In the event of premature death, the death benefit proceeds can provide the family with enough money to help pay for the cost of a child’s education.
Should the insured survive the level term period, the returned premiums can then help offset a child’s college expenses.
3. Death protection and forced savings vehicle for single parents. In 2006, there were 12.9 million one-parent families in the U.S., according to the 2006 “U.S. Census: America’s Families and Living Arrangements.” Single parents of young children have a clear need for substantial amounts of death benefit but are often on a tight budget. For less than the price of permanent coverage, ROP term can provide much-needed death protection. And, for many single-parent families, ROP term life’s guaranteed tax-free premium refund at a competitive effective rate of return may have appeal as a forced savings vehicle.
4. Business planning. Losing a top salesperson or a key executive can be a fatal blow to a small company. ROP term’s death benefit coverage can protect a business from such a loss. Death benefit proceeds can be used to find, hire, and train a replacement, compensate for lost business during the transition, or finance any number of transactions.
Should the key employee survive the level term period, the employer can then use the returned premiums as a retirement income source for the covered executive or to fund other benefits.
5. Baby boomers concerned about retirement income and long term care. For many older baby boomers, there is an inverse relationship between their ages and the amount of life insurance protection they require — as mortgages are paid off and kids graduate from college, the need for life insurance may decrease. At the same time, the call for retirement income planning and long term care protection moves to the forefront. In the event of death, a ROP term life insurance policy can provide a surviving spouse with additional assets that could be used to provide income for lost or reduced pension benefits.
Should the insured survive the level term period, however, the tax-free premium refund could be used to pay for long term care expenses, if needed.
These five examples represent a wide spectrum of potential clients in need of protection for different reasons. For many of them, ROP term offers the right solution at the right time and price.
Marian Sole is senior vice president of life sales for AXA Equitable’s independent life channel, AXA Distributors LLC. She can be reached at marian.sole@axa-equitable.com.