AppMan^© Presents: "Return of Premium Life Insurance, is it Worth it?"
 

Is Return of Premium (ROP) Life Insurance worth it? ROP Life Insurance is a unique Term Insurance that will return all or a significant portion of the premiums paid, back to the policy owner at the end of a Term Period. Let's take a look at the benefits and pitfalls of this unique plan.

In a traditional term plan, clients pay a relatively low premium for a large face amount that will last for a temporary period. In a permanent plan, such as Whole Life or Universal Life, clients pay an increased premium for a reasonable death benefit that will generally last for the lifetime of the client and build cash value on the way. ROP Life Insurance provides a mix of the two; low premiums, temporary protection and cash value build-up.

In your planning, we should assume that the need for the life insurance in this situation is temporary. After all, ROP Life Insurance is Term Insurance used to protect a temporary need. While there are some non-forfeiture benefits and conversion privileges offered by some ROP Life Insurance products, it should not be used in lieu of permanent insurance such as Whole Life or Universal Life coverage.

For our examples today, we will use a Male, Non-Smoker, Standard Risk Class for $250,000 Annual Premiums with issue ages 25, 35 and 45 years old.

The two items that normally get the most attention are the low premiums and refund of premium at the end of the term. The most important element of the refund of premium at the end of the term is the fact that under current tax law it is TAX FREE. This is because the basis in the contract equals the refund of premium at the end of the term. Since there is no gain in value versus premiums paid, the refund is determined to be TAX FREE. There may be some exceptions to this rule if the owner is another person than the insured or premium payor. The refund will generally be TAX FREE if coverage is owned by the insured or spouse of insured and the beneficiary is a personal beneficiary.

One of the most useful tools in presenting this concept to a client is the rate of return percent compared to an outside investment. In the above table, the rate of return ranges from 3.74% to 7.90%. This is determined by calculating the difference of the Regular Term premium by the ROP Term Premium each year and comparing that difference by investing in an outside investment to accumulate and match the refund of premium at the end of the term. Click on the "Quote" link in the above table to see the calculation examples. It is important to note that this is an equivalent return rate AFTER TAX. Considering the refund of premium at the end of the term is TAX FREE, the outside investment rate of return would be even higher if compared considering appropriate marginal tax rates. Financial Markets, Inc. offers a software that will allow you to run these Term vs. ROP Term rate of return calculations. This software can be found at www.fm-inc.com by downloading the Quick Quoter from their Tool Kit.

Now, you have all heard the phrase "Buy Term and Invest the Rest". In fact, some companies have built their sales foundation on this concept in the past. The big problem with this idea is discipline. How many clients will actually "Invest the Rest"? ROP Term provides a type of forced savings that your clients can count on.

Some unseen benefits of ROP term are these: If the insured dies before the end of the term, the beneficiary will get the death benefit (Yes, we are still selling Life Insurance here!). Clients think twice before lapsing this coverage more so than traditional term. At the end of the term the client will have this significant lump sum of money to help with retirement, college planning or to fund a new insurance plan. Also, most ROP Life Insurance products are convertible through the end of the term, allowing for continuation of coverage without evidence of insurability.

In the past year, many carriers have discontinued or increased premium on new ROP Life Insurance products. Sell these products while they are still available at a reasonable price. Financial Markets, Inc. offers you several carriers that still offer ROP Life Insurance. Share this unique product and concept with your clients today! 

Written by: AppMan^©