Return of premium (ROP) riders for term products are popular with consumers for obvious reasons: Recouping up to 100 percent of gross premiums at the end of the level term period can be an attractive benefit.

The riders are also popular with producers because they generate additional premium and, therefore, commission. Expressed as a percent of base premium, ROP rider premium varies widely among different level periods. For example, the rider premium rate might be 140 percent of base premium for 15-year level term and 30 percent for a 30-year level product. For 20-year term, a policy holder pays around 85 percent of base premium for the rider.

ROP riders, first developed in the early 1990s, have been frequently used in mortgage term market. A comparison of products currently in the market showed very similar premium rates and benefit patterns, though premiums may vary by product, underwriting class and issue age.

Despite obvious benefits to consumers and producers, the rider is difficult to price profitably.

One of the greatest risks to the writers of ROP riders is persistency. Lapse rates on products with the rider may be considerably different than without it, especially when the cash value increase is greater than annual premium.

More policies persisting in later durations translate to increasing negative contributions to the bottom line. It is easy for companies to overlook the impact of the rider to the profitability of the base product. In this case, it is critically important because slight changes to lapse assumptions can greatly impact expected profits.


Additionally, the ROP rider can generate significantly higher reserves under Triple X Section 6D if an “unusual pattern of guaranteed cash surrender values” develops.


When pricing ROP riders, actuaries must consider several factors:

• Net investment rate
• Cost of additional reserves required
• Agent compensation
• Profit target
• Standard Nonforfeiture Law
• Mortality cost associated with later duration persistency
• Assumed premium pattern in reserving for limited guarantee term products
• Possible tax implications – Is the ROP a return of basis? Might the ROP disqualify the term plans under 7702?

While ROP riders may be popular with producers and consumers, companies who carefully assess these considerations may find the costs and risks outweigh the benefits.