ROP: A potential menace to retirement

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In the scenario used by this leading insurer in Conseiller.ca/Advisor.ca to promote the Return of Premium (ROP), we had a 40 year old consumer making $70,000 annually. This consumer was putting $12,500 towards his retirement which based on the marketing material provided would build up to a retirement fund of 703 754 $ by age 65. As illustrated, by purchasing a critical illness with a return of premium at a cost of $3467 per year, his age 65 retirement fund would only be reduced to 682 460 $ which meant that the final cost to the consumer for the critical illness coverage would only be about $21,000 over 25 years. So truly in this instance the consumer seems to be able to have his cake and eat it too…

 

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2 comments

  1. Hello Richard,

    Interesting article.

    ROP (Return Of Premium) riders are offered by insuers in various forms, including:
    -ROP at the end of a contractually specified policy year X (assuming no claim is made during the policy period and that the contract is terminated);
    -ROPS if the policy is surrendered (terminated) after Y number of years of being in force
    -ROPD if the insured dies but no claim has been made under the CI policy

    …and various permutations, adjustments and combinations of the above.

    ROP, as such is IMO best defined as a contingent investment (the contingency being the conditions under which the investment is redeemable (“convertible to cash”) by the contract holder. Therefore, ROP, is an investment that is in part “insurance” in the sense that the part of the premium that pays for the ROP rider insures the premiums in case there is no claim.

    For “best scenario” situations (in the sense that it’s best to have the insurance but not to suffer the critical illness), IMO, the best way to assess the efficacy of the ROP rider cost is on a net of tax basis and by IRR.

    For example (all on the basis of net of tax (aka “after tax dollars”)), if the same contract cost $X per year without ROP and $Z per year with the ROP, then $Z-$X=$Y which is the annual cost of the ROP element. So far simple math assuming that the identical contract for CI is being considered with and without the ROP..

    Next, examine what the IRR is for the ROP on a net of tax basis by iterating for the rate of return that would need to be achieved annually, net of tax, on the investment of $Y yearly in advance (at the beginning of each policy year) to collect the ROP sum in arrears (at the end of the policy year at which the ROP sum is to be realized).

    However, and this is important to keep in mind, “all bets are off” if (unless the policy contract states otherwise) you have a claim under the policy before the eligibility for the ROP kicks in (I wish there was a way to put “and this is important to keep in mind” in bold text in this forum).

    Disclaimer and notice: Richard, the above is a general comment and unrelated to the ad referenced in your article (I don’t know which ad that may have been or if I’ve even seen it). Also, to anyone reading my comments, my comments above are to be viewed as general in nature and are not advice nor recommendation on any specific individual case.
    By Ami Maishlish

  2. Chad Martin
    Financial Security Advisor at Freedom 55 Financial

    It is also important to take into account the possibility of a rating on the policy. If the return of premium rider has a rating, it makes even less sense to add that rider keeping in mind the idea that the rider is viewed as an investment rather than insurance. It would be like having a ridiculously high management fee.

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