The Little Known ROP Conversion Option

Jan 8, 2016

  1. BrianLeising
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    BrianLeising New Member

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    We typically sell term life insurance to fill a temporary need, but over time needs change. The reasons for coverage change from debt payoff (mortgage) and employment income replacement to social security income replacement, health care expenses and wealth transfer. These are needs your client will have between retirement and death. Compared to their younger selves (your original term clients), 20-30 years gave your clients not only age, but extra pounds and health problems that didn’t exist decades earlier. What do you do when a new fully underwritten permanent plan of life insurance is not an option? You look at conversion options.

    Most insurance companies allow policyholders to convert their term policy anytime during their initial level term period, up to around age 70, to any permanent plan they make available at the time of claim. Good news! Your client can get permanent coverage. Bad news! They are at the insurance company’s mercy as to what kind of plan is available. Many carriers limit the products available for conversion, usually omitting their most competitive plans, some offering pricey whole life or current assumption (no guarantees) Universal Life. Some carriers by current practice make all their current permanent plans available. Good for them. What will their current practice be in 20 years? Who will own the company then? Clients have no guarantee an insurance company will continue that practice and may be stuck with no guarantees or with high priced options.


    If you can sell your client a permanent and term plan from the start, you can solve this problem. Unfortunately we know that doesn’t work in every situation. Clients may not see the need for permanent coverage or the price may be too high. Here’s another option: Return of Premium (ROP) term. How can ROP help? At the end of the term the client receives cash, walks away and that’s the end of it, right? Most carriers offering ROP actually give the clients three options. The obvious option is to take the cash and run. The client could also apply the cash to convert to whatever permanent plan the carrier makes available at the time, thereby reducing the required premiums to maintain the same face amount. What people tend to forget is the third option. The client can choose to use the ROP funds to purchase a reduced paid-up policy. The policy is paid-up…guaranteed.


    Here’s an example from one company using a preferred non-smoking male age 35 for $500,000: The annual premium is $1100. After 30 years the person could choose a $64,322 paid-up policy. He could alternatively purchase a traditional term for $530/year and 30-pay a $64,322 no-lapse UL for only $544/year. Two separate policies actually represent a savings of $26 in this scenario. But is your client going to do that? If they will, that’s great, you just used the ROP concept to sell a permanent plan in addition to the term you were going to sell anyway. Your client is closer to having the proper coverage for their needs and you made more money. Cha-ching! But how many of your clients are actually going to do that? They may not see the need for permanent coverage. When money gets tight, which policy is going to go? What if they miss a premium payment on the no-cash no-lapse guarantee UL? There are potential leaks in the two-policy plan. People don’t always do what’s best for them, but what is perceived to be easiest. The ROP option gives the client only one policy to deal with and an absolute guarantee their permanent plan will indeed be permanent. They know from day one how much permanent coverage they will have and what the premium will be - zero.
     
  2. rousemark
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    rousemark Still Here!

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    Not all companies offer the RPU nonforfeiture option with their ROP tern. Family life didn't offer it.. (They just pulled out of the ROP market this week.)
     
  3. GreenSky
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    GreenSky Guru

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    This is a "little known" option? I sell almost no life insurance and knew this.

    Rick
     
  4. tlmarketing
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    tlmarketing Guru

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  5. WinoBlues
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    WinoBlues Guru

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    Good summary Brian.

    A couple points. I believe that many Life Insurance agents know something about ROP Term. Prospects do not. Fewer companies offer ReDdPdUp than offer it anymore. Agreed, that most current term and ULTerm plan's conversion options Suck. Not all GULs term or lose guarantees after a missed premium.

    Which company did you quote in your example?

    Thanks,

    Lee
     
  6. rfattore
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    rfattore Expert

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    We have a product called Mega Plan. You can purchase whole life and term and pay only one policy fee. Great for someone who wants larger term face but also purchase permanent coverage. PRCUA.org check it out.

     
  7. WinoBlues
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    WinoBlues Guru

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    Yup, Term riders have been around for many years. I have used them in the past and they have worked very well.

    Guaranteed cost and death benefit are going to be much different than Brian's example I think.
     
  8. pcbinsurance
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    pcbinsurance Guru

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    Little known? How would you know what other agents know?
     
  9. BrianLeising
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    BrianLeising New Member

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    I originally wrote this a while ago, but if memory serves me right I think it was Voya.

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    I have been recruiting and advising independent life insurance agents for about 15 years. When reviewing ROP, I have found more agents who are not aware of this option than agents who are.
     
  10. pcbinsurance
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    pcbinsurance Guru

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    I guess that's why you're advising them.
     
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