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Return-of-premium Life Insurance

July 16, 2014

Life insurance is a valuable component of a benefits strategy, as it has been shown to be held in high value by employees. According to the U.S. Bureau of Labor Statistics, of the 58 percent of private industry workers who were offered life insurance benefits by their employers, 97 percent chose to enroll.

Employers also commonly expand life insurance on a voluntary basis, owing to the wide array of insurance policy options and employee needs.

Given this information, it’s easy to see the value in offering life insurance, but what if there was a way to make life insurance work twice as hard for your organization by doubling as a monetary incentive?

The answer might be found in return-of-premium (ROP) life insurance. Combining elements of term life insurance and whole life coverage, ROP life insurance guarantees insured individuals their premium rates back if no claims are made by the end of the policy.

This can be appealing to employees, who are asked to pay the costs of their supplemental life insurance policy, but are able to recover all premium payments after a length of time. It also provides a strong incentive for employees to remain with their employer.

Plan Details

With an initial term of 15 to 30 years, level premiums (premium amounts that do not fluctuate throughout the duration of the policy) are paid throughout the life of the policy. If at any time the purchaser dies, the beneficiaries of the policy receive guaranteed death benefits tax-free. If, however, the purchaser outlives the term of the policy, he or she recovers the premiums upon expiration of the policy.

For example, a $1,000,000 policy bought for $1,670 a year over a 30-year period would result in a payout of $50,100 upon the expiration of the policy.

The cash that gets paid back at the end of the policy is income tax-free, because it is technically a refund.

Pros

The advantages of ROP life insurance are clear: The employer gets to promote life insurance as a powerful two-fold benefit to current and potential employees, which keeps them tethered to the organization for years, while passing some of the costs of providing the benefit onto the employee and presenting it as an investment opportunity.

ROP life insurance might be extra attractive for companies that employ a younger workforce, or that have a low turnover rate.

Cons

The biggest risk associated with providing ROP insurance to employees is the discontinuation of the policy before it reaches maturity. If that happens, the policyholder will lose some or all of the premium account value. The premium account may also be subject to taxation and/or deferred compensation rules and penalties.

This can happen when there is a lapse in payment to the insurance company. But it can also happen if the employee leaves the company and does not take the insurance policy with him or her, or if the insurance company issuing the policy goes out of business.

The loss of premium dollars can be avoided if the purchaser opts to obtain an enhanced ROP plan that guarantees all premium monies are returned whenever the policy is ended, but this will cost more than a basic ROP plan, which itself is more expensive than a standard term life plan.

ROP is a benefits option that can add great value to your voluntary benefit strategy. It provides employees with a greater selection of benefit options, and can help boost long-term worker retention. However, the length of the policy also makes ROP life insurance difficult to offer, as it carries a significant potential for administrative complications. Any organization that chooses to offer ROP life insurance needs to be extremely knowledgeable about how to manage this benefit over long periods of time.

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