Return of premium rider

[pepeTHEgrate]

Our marketers keep bringing quotes from competition for term products with the return of premium rider. The problem is, some of the riders show no cash values before maturity, and I can't see how it is in compliancy with the nonforfeiture law. Can somebody shed the light, please?

[JMO Fan]

State approval means you can sell, not that the contract complies.

Most states put a low priority on reviewing life forms, especially term and annuities. (Health, HMOs, and hurricanes are hot topics, not life & death.) Insurers often rely on state approval rather than the law; they may infer from approval (or exemption from filing) that the form is exempt under the SNFL provision for unusual contracts -- but that might require a rule be promulgated, not just a "department desk-drawer" position.

SNFL appears to require that ROP riders be considered together with the base term contract. This means they must comply with smoothness, RPU/ETI requirements, and display a cash value table, for starters. They can be revised to comply, but many probably don't.

[pepeTHEgrate]

JMO fan, you've just opened my eyes. Thanks.

That leads to another question, though: what's the penalty for breaking the SNFL, if any?

And what is "JMO"?

[JMO Fan]

Legal ramifications vary from required contract reformation, fines, to class-action lawsuits. It's hard to judge how likely any of these are.
SNFL violations might also result in ABCD action.

The exemption for plans where the commissioner/department determines that SNFL is inapplicable might or might not be defensible. It could also vary by state, e.g., depending on the provision, the authority granted to the department (e.g., rule-making requirements), and how the court views the arguments.

on JMO -- see: http://www.actuary.ca/phpBB/viewtopic.php?t=15343[/url]

[kazh]

professional standards are another consideration --
you know, not doing work that helps somebody break the law

sometimes you can get good advice; other times you have to
figure out on your own whether what you're doing complies

just be careful out there :)

[Spectrum]

Are you talking about a death benefit that increases with each premium that is paid? That would hardly cause cash values to appear. Example, here is your $100,000 face PLUS your seven years of premium $2,100. Sounds more like a sales gimmick instead of a real policy design change.

Are you talking about a return of all your premiums after 10 years if you surrender? That might cause cash values to become necessary. Even if they didn't, in a low interest rate environment this product might only make the term insurance look even more expensive.

There might be some corporate or trust owned insurance possibilities. If the company gets its cost basis back, it might not have to write it off as a expense or as paid compensation...

[urysohn]

Are you talking about ...?
The basic design is a term contract which refunds all premiums at the end of the term period. Especially attractive for mortgage protection policies. You can't lose! You either pay off your mortgage in the unlikely event of death; or you get all your money back!! Conveniently ignores that few people hold their policy to maturity, and also ignores time value of money. But it makes a powerful marketing message.

I've never been a big fan, because it seems like most products offered ignore the smoothness requirements and it's tough to get a reasonable premium if it's designed to be compliant.

[CDesRochers]

You also need to take care that the plan complies with the section 7702 limitations, particularly on a mortgage term plan, where the return of premium amount can easily exceed the NSP for the remaining face amount. Depending on how the benefit is structured, this can generate taxable income under section 7702(g).

[CaptainCavy]

If a term policy does have a return of premium rider or endorsement, how would this be recognized in the annual statement Exhibit of Life Insurance? e.g., treating the return of premium as a pure endowment.