insurance

Changes loom for cash-back term policies

Lifesaver
Highlights
  • New regulation will also give consumers bigger paybacks.
  • Policies may be available in more states but from fewer companies.
  • ROP policies cost from a third to three times as much as term plans.

A popular "cash back" life insurance product is about to get a whole lot more expensive, or may vanish entirely, thanks to a little-known regulatory change that will take effect Jan. 1, 2010.

The insurance at risk is called return-of-premium term life insurance -- commonly called ROP. It differs from traditional term, or temporary, life insurance policies by offering a bonus if you live longer than the policy.

"Return-of-premium policies appeal to people who feel that living through a term policy is a bad thing -- as opposed to dying," says Steven Weisbart, senior vice president and chief economist at the Insurance Information Institute. Living through a policy should be considered a good thing -- but people often feel cheated that they paid into the policy for years, but didn't profit financially from it, Weisbart says.

If you have a traditional term life insurance policy and you live through the length of your policy -- typically 10 to 30 years -- the policy expires and the insurance company pays you nothing. People who have ROP policies get back 100 percent of the cost of insurance if they outlive their policy.

But big changes are coming in ROP -- as a result of the economic conditions and a major regulatory change that takes affect Jan. 1, 2010. Here's what consumers might expect:

  • Significant increases in the cost of ROP policies.
  • More uniform and fair paybacks for policies terminated early.
  • Availability of ROP policies in more states.
  • Fewer companies selling ROP policies.

Aside from unfavorable economic conditions, the biggest reason for the radical changes in ROP coming with the new year is something few people have heard of outside the insurance industry -- it's called Actuarial Guideline 45.

ROP basics

Return-of-premium insurance costs significantly more than traditional term life insurance -- at least 30 percent more and up to  three times as much. The insurance companies invest the extra amount and use the gains to pay for the end-of-policy refund.

"You pay more, and we put the extra aside and invest it so we can earn the amount to pay you back," says Alan Lurty, senior vice president and head of business development for ING U.S. Insurance.

What's more, the cash you get back at the end of the policy -- often tens of thousands of dollars -- is income-tax free, because it is technically just a refund of your own money.

While return-of-premium accounts comprise only 5 percent to 10 percent of all term policies written each year, according to Byron Udell, founder and CEO of AccuQuote.com, they have grown steadily in popularity over the past decade. However, consumers may only have until the end of this year to lock in what attractive rates remain. So far this year, Udell says, Genworth Financial has discontinued its ROP products and ING has dropped one version.

The devil in ROP is often in the details: Policies differ widely between the half dozen or so companies that offer them, says Dominique Lebel, senior consultant for Towers Perrin, a Stamford, Conn.-based consulting firm.

Historically, the biggest difference between policies existed in the built-in provisions regarding what happened if you chose to close your policy before the end of your term.

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Generally, Lurty says, "These policies gradually increase the amount you can get back each year you hold the policy."

With a 30-year policy, a customer who closed the policy after five years may get nothing back; 10 percent back after 10 years; 30 percent return after 15 years; and 100 percent at 30 years.

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