insurance

Changes loom for cash-back term policies

Other companies, however, may not have given any interim refunds -- just a total, lump sum at the 30-year point.

Those variations and inconsistencies are what the National Association of Insurance Commissioners wanted to address with Actuarial Guideline 45, which is part of the Accounting Practices and Procedures Manual, which all states follow.

With the new guideline, the refunds will be uniform, industry wide, regardless of which company wrote the policy.

That new rule will mandate that each company pay back a significantly higher portion of the premium earlier than they do now if you cancel the policy before the end of the term.

Because the companies have to be prepared to pay back more money, sooner, the policies likely will get more expensive.

Lurty says he doesn't know yet how much ING will raise rates, but suspects every return-of-premium policy written next year will cost significantly more.

"We are still in the middle of pricing. But I have seen at least one other competitor do their pricing, and they are looking at 30 percent to 50 percent higher than they were," he says.

More states, fewer companies

Aside from higher prices, the next biggest likely effect of the rule change is that more people may have access to return-of-premium policies than did in the past.

"Under the current rules, the insurance commissioners in a couple of states didn't approve this product at all," Lebel says. "This will bring the policies in line with the rules those states were looking for, and it should mean more people will have access to these policies."

Pennsylvania and Utah, for example, banned these policies because the refund schedules conflicted with state law.

At the same time, however, some companies that now offer return-of-premium policies are planning to respond to the new rule by discontinuing them, Lebel says.

With an internal return on investment on a typical ROP averaging 6 percent, says Udell, and a long-term interest rate on insurance company investments stuck at 3 percent, insurers can't afford to provide coverage, pay claims and return all the premium. "The solution," he says, "is to drop the product or raise rates dramatically."

Who should jump

Return-of-premium policies aren't for everyone. Many financial advisers steer middle-class customers away from these policies, suggesting they take the difference in price and invest it in something like a mutual fund where they potentially could earn many times the amount promised by the policy refund.

On the other hand, return-of-premium advocates point out that the policies force you to make the regular payments, and stress the tax-free benefits, which are often very attractive to high-income people.

If a typical term policy cost $1,000 a year less in premiums than a return-of-premium policy and you invested that amount yourself for 30 years at 6 percent annual interest, you could earn more than $80,000. That would be some $20,000 more than you would have gotten back, typically, from a premium refund at the end of the policy term.

ROP policy advocates, however, stress that the premium refunds are guaranteed, while mutual fund returns are not.

Because the new rule takes effect Jan. 1, 2010, time is running out before the new, higher premiums kick in.

"If you are interested as a consumer, you should get in this now or at least before the end of the year before rates go way up," Lurty says.

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