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Whatever happened to ROP term? With economic struggles and the enactment of new regulations, ROP term products have unfortunately fallen out of favor among producers and carriers. Here's why the product is still a great client solution and should be included in your product portfolio.

We are creatures of habit. For several weeks, I endured a long commute home imposed by freeway construction. Totally forgotten was the old two-lane artery I used before the freeway came to my neighborhood. I've now returned to my old road and am relieved that few others have done the same. Hopefully, my fellow commuters will remain creatures of habit and view the freeway as their only option for getting home.

Thinking about return-of-premium (ROP) term life products reminded me of my "new" way home, because I believe ROP term has become a forgotten option. And like my route home, ROP term might be an option that would pay you dividends to consider once again.

Here's a quick primer on why you should consider adding ROP term to your product toolkit and begin telling your clients about it again.

Why was ROP Term popular?

Most of us are familiar with the basic structure of a ROP term product. The "end game" promise is that at the conclusion of your level premium term period, you receive the return of the base premiums you paid, assuming you fulfilled the contract and weren't in default. Along the way, cash value grows as a percentage of the premiums you've paid.

This cash value feature makes the product more expensive than traditional level premium term. But the longer the coverage period, the smaller the difference in premium. Thus, ROP term became popular as a rider on mortgage term policies where the coverage period often is 30 years. Consumers accepted higher insurance costs in order to receive premiums back when the mortgage was paid off. The incremental premium seemed de minimis when compared to the overall cost of mortgage payments. In fact, it was, and still is, so popular that it is virtually mandatory for a carrier to offer a ROP feature if it wishes to establish a presence in the mortgage term market.

ROP term also found a substantial following among younger insureds just starting a family, with a need for up to 30 years of coverage, but yet not prepared for the more substantial investment required for a permanent policy. Often, these are healthy individuals who recognize they're likely to survive to retirement and dislike the notion of paying for coverage they might never need.


ROP term's attractiveness to younger clients also contributed to its popularity with producers, given the economics involved in selling an otherwise very low premium level term policy to the prospective insured.

So what happened to ROP term?

Two factors caused ROP term to seemingly disappear almost overnight in 2009.

First was scarcity of capital in the economy, driving the cost of financing reserves for long guarantee products to unsustainably high levels. As a result, hardly a month went by in 2009 without a carrier announcing it was withdrawing a product that featured long term guarantees such as ROP term.

The second factor was driven by the very success ROP term had enjoyed.

ROP term became so popular that state regulators became involved early in 2009, drafting regulations to clarify the treatment of the product under cash value statutes. Removing ambiguity in these statutes was also a means of leveling the playing field for carriers offering ROP term products. The changes became effective on Jan. 1, 2010.

In a nutshell, "Actuarial Guideline 45" (Guideline CCC) treats ROP base policies and riders exactly the same way. This changed the way many carriers valued the ROP benefits provided and associated cash values. While there are a number of subtle complexities involved, the changes were sweeping and many carriers dropped out of the market at the end of 2009.

So is ROP term gone?

Absolutely not. ROP term continues to be popular in the mortgage term market. In the retail market, several of the larger term carriers still offer a ROP term product. Premiums have mostly increased (as have costs of many traditional term products) but ROP remains a popular concept with consumers.

Have you--like me with my commute home--forgotten what made ROP term popular and reverted to offering only term and/or universal life (UL) products to your clients? If so, read on as we address features of ROP on the market today and how they can meet your clients' needs.

ROP term: A great client solution

Guarantees: As before, most products offer guaranteed premiums, death benefits and cash/endowment values. This is less common in the mortgage market, though exceptions do exist; if this is important to your client, check for products with appropriate guarantees.

Return of Premium: Virtually all products offer at least a return of "base premiums paid" at the end of the level premium period. Some products automatically provide the return. Alternatively, there are products requiring the client to proactively surrender the policy if he wishes to receive the return of premiums, but these products often present more flexible options to the client if he opts not to surrender the policy.

Cost: ROP term is more expensive than traditional term which provides no cash values. Generally speaking, the incremental cost remains attractive on longer duration products (ROP 30 being the most popular term period chosen).

Demographics: ROP term has historically been popular among clients under age 40 and particularly among women (who can be the financial decision makers at the point of sale). Both groups have compelling reasons to believe they will survive to the end of the term period.

Return: The return of premium feature can provide a supplemental fund for retirement years should the client survive to receive it. Also, the return generated by the incremental premium can be attractive to clients who support the "buy term, invest the difference" concept.

Conversion: Many ROP term products can convert to some form of permanent coverage without new underwriting. This is a valuable feature to a client should his or her health deteriorate and a need for permanent coverage arise.

Cash values: ROP term products are designed to economically provide a return of premiums at the end of the level premium period. Cash values will be low in the early years, building towards the end of the term.

Market niche: ROP term is a great tool for your product toolkit and has good compensation for producers who primarily sell traditional term insurance only. ROP Term also represents an attractive addition to the portfolios of producers who are encountering resistance to the higher prices of some UL product designs.

With today's feature-rich products, ROP term can be a smart choice for budget-conscious clients. The right policy, termed for their needs, provides insurance protection now while growing worth for later. Be sure to check carrier Web sites for new producer tools that can help you evaluate products quickly and efficiently. If you've never sold a ROP policy, or if you've been focusing on other products, now is the time to explore how ROP term can meet your clients' needs.

By Leigh Harrington, FSA, MAAA

Leigh Harrington is vice president, life product line business leader for American General Life Companies. In this role, he is responsible for the overall management of term insurance. Mr. Harrington was an industry member of the Regulation XXX Committee, which put together the Regulation adopted in 2000. Additionally, he worked closely with the ACLI in developing recommendations for Actuarial Guideline CCC, which regulates ROP Term insurance policy values.

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Title Annotation:TERM LIFE
Author:Harrington, Leigh
Publication:Life Insurance Selling
Date:Oct 1, 2010
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