Have you heard this riddle? What is invisible yet comes with a sizable price tag, may never be used but cannot be returned? Insurance! It’s not uncommon for a client, especially one who is young and healthy, to question paying premium for coverage that might never be used.
Life insurance is really the only type of insurance that if kept in force long enough will definitely result in a claim. All other products, from homeowners to automobile to disability insurance, have only a probability of being needed. After using the product for one year, without a claim, a client often deliberates about paying the next annual premium.
Fortunately, there is a solution to this common objection. The next time you hear the “wasted premium” objection suggest the Return of Premium (ROP) feature to the client.
Although the terms of the rider vary by carrier, here are a few facts about the Disability Return of Premium rider.
- Some portion of the paid policy premium will be refunded to the policy owner.
- Return of Premium rider increases the total policy premium.
- The actual percentage refunded can vary from 100 percent of paid premiums to 50 percent of paid premiums.
- Premium refund is paid in cash.
- All refunds are reduced by an amount equal to any paid benefits.
- The distribution of the refund can be at the end of the policy, upon cancellation, lapse, expiration (at age 65 or 67), or death. Or the premium refund may be distributed at periodic intervals, such as five or ten years.
- The premium refund is usually considered to be not taxable, but always check specific situations with an accountant.
- The refund does not include interest.
The return of premium rider is debated among financial professionals. Similar to the adage “Buy term and invest the rest,” those opposed to the rider suggest investing an amount equal to the additional premium for a greater financial return.
Theoretically, the return is often higher. But before nodding in agreement, consider two truths consistently documented in financial circles:
- Many Americans are unprepared to weather even a short-term financial crisis of two to three months.
- The average retirement savings account balance for pre-retirees 55 – 64 is only $104,000. The ROP rider can be a sort of forced-savings with the distribution becoming part of a larger retirement plan.
As an advisor, you know your client’s level of financial discipline. Use your personal insights and a few calculations to inform your recommendation. Our article, Why Disability Insurance Policy Language Matters: Return of Premium, examines the Return of Premium rider with examples you can use for your own calculations.
Ask your DIS representative to quote your next case with and without the Return of Premium rider. And ask for the rider details. As outlined above the differences in the rider benefit and premium can be significant from product to product. Contact us today to learn more about ROP riders or any of the many other riders available to customize a disability policy for your client.