Coming soon: return-of-premium term life: new rating classes and level premiums helped term life insurance grow over a decade. Return-of-premium term may be the next big advance.

For those buyers who hate the idea of paying premiums for 20 or more years on their term life-insurance products and then outliving the term, the life industry is making a new proposition: Get all of your money back.

Return-of-premium term life launched several years ago, but demand for it is picking up, insurers are responding with more ROP riders, and consulting actuary James Wiseman says it is an idea whose time has arrived, it is a way of adding an investment component to a term policy, but in a very efficient way, said Wiseman, a vice president with Actuarial Strategies Inc., a consulting firm in Bloomfield, Conn.

"You're only getting your principal back, so it's tax free," he said. "And since the savings clement is more of a piggybank than an investment, the buyer doesn't have to worry about types of investments or interest rates."

ROP term policies cost more than regular level-premium term products, and some might argue the extra money spent on them is a kind of investment. That's because by paying the additional premium stipulated by a ROP rider, the contract owner gets back not only the additional premium, but also the premium paid for the base coverage. For longer terms, the effective annual return on that additional premium is often in the 7% to 9% range, Wiseman said. Others have said the return is sometimes less.

Of course, paying the extra premium erodes the value of the maxim to buy term and invest the difference. And there is a catch: That guaranteed annual return only materializes if the buyer holds the policy to the end. Cancel it prematurely, and the return of premium dwindles to a small percentage. Die during the term, and you will have paid more for the death benefit.

An Emotional Decision

"The sale is made more emotionally than financially in my mind," said Byron Udell, founder and chief executive officer of AccuQuote, a life insurance broker that provides quotes online. He noted that term life writers rarely need to pay a claim because insureds usually die after the term, or policies lapse. "ROP term answers that objection," he said. "I own about $7 million of it myself."

"They view it as a bet on their gene pool," said Robert Bland, founder and chairman of Quotesmith.com, which markets at the Insure.com Web site. "They look at their family's health history, and the volatility of the stock market, and they see it as an investment in themselves."

Doug Israel, senior vice president of product development and advertising at AIG/American General, said his company's ROP term business grew slowly at first, but has tripled in the past two and one-half years. "It's become a fairly significant piece of our overall term portfolio," he said. "If we took sales from the product alone, it would rank us in the top 20 of all term writers." Israel declined to provide sales figures, but acknowledged that American General is one of a few top sellers of the product. It is also the top term writer overall by a fairly wide margin, according to marketing and research firm Limra International.

American General's largest ROP seller is the 30-year product, which Israel said buyers often use to match up against a mortgage. After six years, the policyholder is entitled to a return of a small percentage of premium paid. At 24 years, that percentage grows considerably. "If a buyer really intends to keep the product for the full term, it's a good deal," he said. "People know to buy term and invest the rest, but the reality is that people don't invest." The company also offers 15- and 20-year ROP term products.

American General expects growth of the product to accelerate, even as more companies enter the marketplace, because more products on the market means greater public awareness, Israel said. Most of the company's sales are through its brokerage platform, which is based in Milwaukee. It does business through intermediaries, primarily independent marketing organizations such as AccuQuote, Matrix Direct or Select Quote, but also through brokerage general agencies. Often the independent marketing organizations focus on a particular niche, like mortgage insurance, Israel said. "The product definitely requires a marketing organization, but I think it's fairly straightforward," he said. "If you surrender the policy early, you don't get all your money back."

Udell said AccuQuote has been marketing ROP term since its inception, but said sales the past two years have remained at 5% to 10% of all term life products. He expects to have "a bit more" of the market in another two years. Bland said Insure.com did not sell any ROP term two years ago, but that sales last year represented about 5% of all term products. Through the first half of this year, they represented 12%. "We just provide it now automatically in our quotes" he said. "This is all due to consumers picking it. They run the mouse down the list and click the buy button."

Favorable Environment

It would be a little strong to say ROP term represents a new era in term products, according to Wiseman. But, he identified several factors that are enabling the development of ROP term as well as other term-life products:

* A lowering of regulatory barriers as states try to unify their regulations to make it less difficult for companies to introduce products.

* The possibility of optional federal regulation, which is causing states to make state-based regulation more efficient.

* Changing demographics that are creating more demand for term insurance, and for life insurance in general. "The public has had 25 years of 'buy term and invest the difference' drummed into their heads, and when there is an increase in demand for life insurance, it tends to plow into term," he said.

* Mortality improvement and new mortality tables. Term insurance is very competitively priced, and it reflects "true economics," said Wiseman. Some companies "may get a little ahead of the curve, but the fact is that mortality is improving, and that will cause some companies to lower rates."

One other trend is the development of tools that allow for more rapid underwriting, which should help make products more available and easier to buy, especially for middle-income prospects. Wiseman said these tools make ROP an attractive rider both for insurers and insureds. "From the companies' point of view, if you're lowering underwriting barriers, you're taking on a little more mortality risk in order to increase business," he said. "So you're interested in riders with a no- or low-mortality component. ROP fits that."

ROP also aligns the interests of the insurer and consumer in that it encourages persistency. "High lapses are the bane of term products" he said. "Anti-selection and worse mortality are problems, but what drives up term rates as much as anything are high lapse rates in the early years." Insurers must pay high commissions to encourage producers to sell the term product, and the insurer needs policies to stay on the books to make up the commission, he said.

Wiseman acknowledged that there is debate in the industry about whether ROP term ought to be considered a cash-value policy. Regulators in some states believe it should be treated as a cash value. New York, in particular, "dramatically changes the treatment of it and makes it more expensive as a consequence," said Wiseman. But most states view the terminal dividend as an endowment. The argument becomes murky, however, when companies allow a partial endowment--a partial return of premium--before the end of the term.

"There's a lot of debate about whether the standard nonforfeiture law applies to it, and if so, how it should be applied," he said. "In other words, should you integrate all the benefits of the base policy, or is the rider something an owner can lapse? All these treatments haven't been hammered out yet. It's almost on a state-by-state, product-by-product basis ... This ought to all be hammered out. It's an important enough product that the states ought to decide what they want to do with it."

Other Term Riders

While ROP term is attracting a lot of interest, term life with a disability rider is still more popular. "Disability is a pretty obvious choice for someone buying term because they are largely interested in covering risks during their working years," Wiseman said. Product terms vary enormously depending primarily on the length of disability coverage chosen, percentage of income replaced, the choice of any occupation or own occupation, and age of the insured. Similarly, some term products come with riders providing benefits upon diagnosis of a critical illness. Long-term-care riders, on the other hand, are not a good fit with a term policy since LTC is not usually a risk associated with the working years, he said.

Both Udell and Bland said they do not provide Web-site quotes for these other types of riders, but make them available when sales personnel interview prospects. "These products are not easily comparable," said Udell. "We give them keys to the store so they can obtain quotes, but we tell them they might make a mistake. If there's a need for coverage or an interest in other types of products, we talk with them. These products have so many moving parts."

"We are a duly licensed agent for companies; we'll show whatever is available," said Bland.

Interestingly, Bland said underwriting using the new tools is more detailed, more complicated and takes just as long as before. Many applications are 20 to 30 pages long. That may be because online sites show the best pricing, which requires that prospects qualify for the most advantageous rating classes.

"Underwriting is tighter than ever before, especially in areas of security and foreign travel," said Bland. "In the old days, if you indicated foreign travel, the underwriter would wink and the company would issue the policy." Now they want to know where a prospect is going, for how long, and if the itinerary includes countries on the government's travel warning list, he said. The concerns are death and money laundering.

"I believe that no life insurance company wants to get caught insuring a terrorist," said Bland. "But it's also a security issue. Insurers now drill down to beneficiary Social Security numbers and frequently conduct background checks." To avoid an increase in the number of policies that become investor-owned, insurers also ask whether the proposed insured previously owned a policy that has been transferred to a third party, Bland said. "Life companies are in no hurry to issue a policy," he said. "No one is writing faster."

Bland added that case law now challenges the previously "ironclad" two-year contestability clause. Under that rule, insurers may contest payment of a death claim only during the first two years of a policy. But now if parties are found to have engaged in an illegal act, insurers could refuse to pay the death benefit, Bland said.

Key points

* The demographic and regulatory environments are favorable for term life insurance.

* Return-of-premium term life resounds with buyers who believe they are good risks,

* Some regulatory matters are unresolved about return-of-premium term.

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AIG/American General Life Insurance Co.

A.M. Best Company # 06058

Distribution: Personal producing general agents, brokers, independent marketing organizations, agency system

For ratings and other financial strength information about these companies, visit www.ambest.com

Sharing the Riches

If an owner/insured of a return-of-premium term life product lives to the end of the policy's term, the insurer has made a killing on the base policy, said James Wiseman, consulting actuary with Actuarial Strategies Inc. That's why insurers are able to offer full premium refunds to owners who keep their contracts the entire term, coupled with the fact that insurers don't have to pay a death benefit on the vast majority of term policies.

Henna hypothetical example Wiseman gave for a 30-year level-premium policy:

Monthly premium: $130

Premium for a straight policy: $100

Premium for ROP rider: $30

Total amount paid for rider: $30 x 360 months = $10,800

Total return of premium: $130 x 360 months = $46,800

Total gained by paying rider premium: $100 x 360 months = $36,000

Annualized return on rider premium: 8.75%

How much would a comparable monthly premium buy? Here are some real-life examples from Insure.com:

Monthly payment for male, age 43, $500,000 face amount, 30-year ROP term, top rating class:

American General Life/AIG, $112.88

Fidelity and Guarantee Life/Old Mutual, $126.90

American General Life/AIG, $134.95

Comparable straight term insurance, American General Life/MG, $94.50

Term Products in Demand

Term life insurance was the most popular in 2004 by policies sold.
Among term products, 20-year level-premium policies were by far
the best sellers.

[GRAPHIC OMITTED]

Source: LIMRA 2004 U.S. Individual Life Sales Survey

Term Life Premiums
With ROP Rider

Return-of-premium policies carry
annual premiums greater than the
premiums for the base term-life
coverage. Longer terms, however,
reduce the percentage
above base premiums.

[GRAPHIC OMITTED]

Source: Milliman Inc.

Top Term-Life
Insurance Writers

(Alphabetically)

2003                        2004

Aegon USA                   Aegon USA
AIG/American General        AIG/American General
Fidelity & Guaranty/        Fidelity & Guaranty/
Old Mutual                  Old Mutual
Genworth Financial          Genworth Financial
Banner Life                 Banner Life
MetLife Inc.                Primerica
New York Life               New York Life
Northwestern Mutual Life    Protective Life
Prudential Financial        Prudential Financial
State Farm                  State Farm

Source: Limra International