Return of Premium Term Policy

[newyorker55]

I have recently come across this return of premium term policy. What do you guys think about it? Pros? Cons? Do you sell it? Is it worth it?

I think its a great idea for people in their 20's,30's,and maybe even 40's

Let the discussion begin!

 

[GreenSky]

I have recently come across this return of premium term policy. What do you guys think about it? Pros? Cons? Do you sell it? Is it worth it?

I think its a great idea for people in their 20's,30's,and maybe even 40's

Let the discussion begin!

If you use the search feature of the forum you'll see about 40 hours of discussion on this.

Rick

 

[meclimit]

Whether term or ROP term is better generally depends on the answer to the following questions:

1. What is the premium for the ROP term policy?
2. What is the premium for the same non-ROP term policy?
3. What is the difference in premium between the price of the term policy and the price of the ROP term policy?
4. What rate of interest would your client expect to be able to make on a safe investment over the length of the term period.
5. Calculate the present value of the future ROP term payment based on the interest rate in number 4.
6. Calculate the present value of the "savings" (a stream of payments) between the term and ROP term.

So, take for example a 30-year term policy for a female with a premium of $350 per year, and the same benefit ROP policy that costs $1000 a year.

3. 650
4. I will assume a conservative 2.5% rate.
5. Present value of $30,000 payment in 30 years at 2.5% is 14,302.
6. Present value of stream of $650 yearly payments for 30 years at 2.5% is 13,605.

Ask your client is it worth $700 to bind them to making an extra $650 in premium payments each year over the next 30 years, with the risk that if they don't make each and every payment and keep the insurance that the ROP benefit will decline significantly or disappear? Most clients would walk away from the ROP even at a conservative rate of 2.5%. At 3.5% the non-ROP term is significantly better and is a no-brainer.

PV calculators available at investopedia. Can't post the links.

 

[WinoBlues]

Whether term or ROP term is better generally depends on the answer to the following questions:

1. What is the premium for the ROP term policy?
2. What is the premium for the same non-ROP term policy?
3. What is the difference in premium between the price of the term policy and the price of the ROP term policy?
4. What rate of interest would your client expect to be able to make on a safe investment over the length of the term period.
5. Calculate the present value of the future ROP term payment based on the interest rate in number 4.
6. Calculate the present value of the "savings" (a stream of payments) between the term and ROP term.

So, take for example a 30-year term policy for a female with a premium of $350 per year, and the same benefit ROP policy that costs $1000 a year.

3. 650
4. I will assume a conservative 2.5% rate.
5. Present value of $30,000 payment in 30 years at 2.5% is 14,302.
6. Present value of stream of $650 yearly payments for 30 years at 2.5% is 13,605.

Ask your client is it worth $700 to bind them to making an extra $650 in premium payments each year over the next 30 years, with the risk that if they don't make each and every payment and keep the insurance that the ROP benefit will decline significantly or disappear? Most clients would walk away from the ROP even at a conservative rate of 2.5%. At 3.5% the non-ROP term is significantly better and is a no-brainer.

PV calculators available at investopedia. Can't post the links.

Couple questions. Is your 2.5% net of taxes? The ROP is contractual so what guaranteed return vehicles are you assuming? How do you value the reduced paid up options in some ROP Term plans?

Also can you explain this a bit more >>" with the risk that if they don't make each and every payment and keep the insurance that the ROP benefit will decline significantly or disappear? "

Lee

 

[Cornelius]

What are the options at the end of the guaranteed premium period? Can the policy be converted to a paid up policy? Many times it's not just about price. Some people do like the guaranteed cash refund and its a good option with a court required policy such as with a divorce.

 

[WinoBlues]

What are the options at the end of the guaranteed premium period? Can the policy be converted to a paid up policy? Many times it's not just about price. Some people do like the guaranteed cash refund and its a good option with a court required policy such as with a divorce.

Depends on the company. Last year I converted one that had not termed out yet We used the ROP, in this case about 50%, as a dump in into a short pay GUL. They could just take the ROP and walk away or take a Reduced Paid up policy. Could be used as a paid up FE policy.

ROP rates have gone up over the last ten years. With the low cost of GUL the comparisons get a little blurred. Still a good solution for the right client. Some of the older ones really rock.

 

[Tahoe Ray]

Whether term or ROP term is better generally depends on the answer to the following questions:

1. What is the premium for the ROP term policy?
2. What is the premium for the same non-ROP term policy?
3. What is the difference in premium between the price of the term policy and the price of the ROP term policy?
4. What rate of interest would your client expect to be able to make on a safe investment over the length of the term period.
5. Calculate the present value of the future ROP term payment based on the interest rate in number 4.
6. Calculate the present value of the "savings" (a stream of payments) between the term and ROP term.

So, take for example a 30-year term policy for a female with a premium of $350 per year, and the same benefit ROP policy that costs $1000 a year.

3. 650
4. I will assume a conservative 2.5% rate.
5. Present value of $30,000 payment in 30 years at 2.5% is 14,302.
6. Present value of stream of $650 yearly payments for 30 years at 2.5% is 13,605.

Ask your client is it worth $700 to bind them to making an extra $650 in premium payments each year over the next 30 years, with the risk that if they don't make each and every payment and keep the insurance that the ROP benefit will decline significantly or disappear? Most clients would walk away from the ROP even at a conservative rate of 2.5%. At 3.5% the non-ROP term is significantly better and is a no-brainer.

PV calculators available at investopedia. Can't post the links.

Compulife has a calculator that makes this really simple.

All insurance policies come with risk in not paying the premium.

It really depends on age, health, length of term...pretty easy to do the math.

Then again, the clients in our business aren't always logical. Some don't like the idea of ANOTHER insurance policy that they'll pay for and never see a return on unless something bad happens.

Also, buying traditional term and "saving" the difference often involves "spending" the difference instead.

There are a lot of practical applications for these products. Buy/Sells are another place where they seem to have some appeal.

The cash and Rd Pu options are hard to quantify as well...

Bottom line, when you give your recommendation, let your client know that these products are available and how they work. A conversation will follow as to whether or not this product is right for them.

----------

Couple questions. Is your 2.5% net of taxes? The ROP is contractual so what guaranteed return vehicles are you assuming? How do you value the reduced paid up options in some ROP Term plans?

Also can you explain this a bit more >>" with the risk that if they don't make each and every payment and keep the insurance that the ROP benefit will decline significantly or disappear? "

Lee

You can find 2.5% easily with munis (tax-free) or MYGAs (tax deferred).

I normally look for an ROP advantage closer to 3-3.5% since the buyers are normally younger and have a more aggressive risk profile.

 

[scagnt83]

Cinci Life has an excellent ROP Term.

Every year buys you a set amount of Paid Up insurance.

I once spoke to an exec in the life department at Cinci, he claimed that over 80% of ROP clients chose the PaidUp option vs. the ROP at the end of the term.

To me that shows a true need for Permanent vs. Term.

But I would rather sell an ROP that has the PaidUp option vs. a traditional term.

 

[meclimit]

I will have to look into the Cinci life ROP term.

Two other drawbacks of ROP term.

1. Its usually now about three times more expensive than non-ROP term. For families on limited budgets, it doesn't work so well. Either they have to lower the amount of coverage or take the money from somewhere else. If they need 1.5 mil in coverage then I am very much opposed to lowering it to $500k just to buy ROP.

2. If you die during the ROP period, then under any ROP policy I have ever seen the ROP benefit is lost. To do a true apples to apples comparison with non-ROP term, you have to account for this (which I did not above). This can be a big factor at older ages.

Obviously some of you disagree, but a 3% "guaranteed" return on an ROP policy over a 30-year period isn't the best return, particularly if the purchaser has to lower his or her Roth/401(k) contributions to afford it. As Tahoe ray mentioned, most young people have a more tolerant risk profile than this.

Lee, you are correct that the returns are used are after tax. Also, under many ROP policies, if the policy lapses because a premium is not paid, then the ROP benefit is lost. Its a forfeiture, plain and simple. If it ever happens, then don't be surprised if the client tries to blame the agent that sold the policy.

If someone really does have extra money to spend and likes the guarantees of insurance, then each and every time I have crunched the numbers, it appears better to buy the amount of coverage needed, and divide it up between term and a heavily funded whole life policy (with APIs). That way the client has access to the cash values of the whole life policy during the 30-year period, and the return (with dividends) is better. Then convert the term over time.

 

[WinoBlues]

I will have to look into the Cinci life ROP term.

Two other drawbacks of ROP term.

1. Its usually now about three times more expensive than non-ROP term. For families on limited budgets, it doesn't work so well. Either they have to lower the amount of coverage or take the money from somewhere else. If they need 1.5 mil in coverage then I am very much opposed to lowering it to $500k just to buy ROP.

2. If you die during the ROP period, then under any ROP policy I have ever seen the ROP benefit is lost. To do a true apples to apples comparison with non-ROP term, you have to account for this (which I did not above). This can be a big factor at older ages.

Obviously some of you disagree, but a 3% "guaranteed" return on an ROP policy over a 30-year period isn't the best return, particularly if the purchaser has to lower his or her Roth/401(k) contributions to afford it. As Tahoe ray mentioned, most young people have a more tolerant risk profile than this.

Lee, you are correct that the returns are used are after tax. Also, under many ROP policies, if the policy lapses because a premium is not paid, then the ROP benefit is lost. Its a forfeiture, plain and simple. If it ever happens, then don't be surprised if the client tries to blame the agent that sold the policy.

If someone really does have extra money to spend and likes the guarantees of insurance, then each and every time I have crunched the numbers, it appears better to buy the amount of coverage needed, and divide it up between term and a heavily funded whole life policy (with APIs). That way the client has access to the cash values of the whole life policy during the 30-year period, and the return (with dividends) is better. Then convert the term over time.

So I will have to get to this latter. But the above argument is mixing apples, oranges and rhubarb. :-\

----------

#1) then I would not sell the ROP. I have many tools to choose from. I would not use a 12 sledge to drive a tack nor a tack hammer to drive a cement stake.

#2) what happens to the extra premium they would have paid into a Whole Life, UL, GUL or IUL? Or in a 30 term if they die in year two? In that case is ART best? What happens to the family in #1 if the bread winner dies after the term terms out? What do they get for all those premiums?

Rate or return? In #1 they would not have money to invest they could only afford the full face amount with term. So wouldn't your return be 100% of zero? Who is taking away the it IRA?

Lapses, how much does your lapsed term pay?

Which ROP plans are you basing all this on. I have not sold all of them but I have solid a few.

Lee

I will have to look into the Cinci life ROP term.

Two other drawbacks of ROP term.

1. Its usually now about three times more expensive than non-ROP term. For families on limited budgets, it doesn't work so well. Either they have to lower the amount of coverage or take the money from somewhere else. If they need 1.5 mil in coverage then I am very much opposed to lowering it to $500k just to buy ROP.

2. If you die during the ROP period, then under any ROP policy I have ever seen the ROP benefit is lost. To do a true apples to apples comparison with non-ROP term, you have to account for this (which I did not above). This can be a big factor at older ages.

Obviously some of you disagree, but a 3% "guaranteed" return on an ROP policy over a 30-year period isn't the best return, particularly if the purchaser has to lower his or her Roth/401(k) contributions to afford it. As Tahoe ray mentioned, most young people have a more tolerant risk profile than this.

Lee, you are correct that the returns are used are after tax. Also, under many ROP policies, if the policy lapses because a premium is not paid, then the ROP benefit is lost. Its a forfeiture, plain and simple. If it ever happens, then don't be surprised if the client tries to blame the agent that sold the policy.

If someone really does have extra money to spend and likes the guarantees of insurance, then each and every time I have crunched the numbers, it appears better to buy the amount of coverage needed, and divide it up between term and a heavily funded whole life policy (with APIs). That way the client has access to the cash values of the whole life policy during the 30-year period, and the return (with dividends) is better. Then convert the term over time.