Return-of-premium (ROP) riders can refund some or all eligible premiums on a critical illness (CI) or disability insurance policy if the insured remains claim-free for a specified period or until the policy expires. It can be costly though, depending on the client and product. For some, it may be expensive enough to prevent them from purchasing additional insurance.
Adding an ROP rider to an Empire Life CI policy can increase premiums by 10–20%, while adding one to an RBC Insurance disability policy can increase them by 30–40%, according to the insurers. ROP riders generally cost more on disability insurance policies.
Advisors must weigh the value of that guarantee against the opportunity cost of the additional premium and make sure the rider doesn’t compromise the amount of insurance the client needs.
Four insurance experts explain how they approach that decision.
Prioritize coverage
Advisors should prioritize the insurance benefit over an ROP rider, said Joseph Trozzo, vice-president of national investment sales at Equitable Life in Toronto.
The first priority should be buying enough coverage to address the financial consequences of an illness or disability, he said. Depending on the policy, that could mean replacing income, paying down debt or covering health-care costs and home renovations.
For example, with disability insurance, an advisor might determine that a cost of living adjustment rider — which can help benefits keep pace with inflation — is more valuable to the client than an ROP, Trozzo said.
“In most cases, I would prefer to see the client get more monthly benefits or get a higher lump sum.”
Once the client has sufficient coverage, an advisor can consider whether paying extra for an ROP makes financial sense.
Advisors can calculate the rate of return of an ROP rider and compare it with the potential return on investments that reflect the client’s risk tolerance, Trozzo said.
“You should be providing advice that allows the client to make the best decision based on their particular financial situation,” he said. “If you’re going to promote the ROP option … you have to make sure you’re showing them all the different opportunities and solutions.”
Consider need, budget, certainty
Farzana Damji, senior director of product development at RBC Insurance, uses a three-part test: Does the client need the insurance protection? Can they comfortably afford the rider? And do they value certainty more than the potential upside of investing the money elsewhere?
“If the answer to the three points is yes, then an ROP is going to be a good choice,” Damji said.
At RBC Insurance, about 30% of clients who buy a CI policy add an ROP rider, he said. Most are attached to permanent CI policies because ROP eligibility generally requires the policy to remain in force for a minimum period.
An ROP rider may also be useful when a company buys CI or disability coverage as part of a key-person insurance arrangement, Damji said. In some situations, the employer and employee may share the cost, with the employee potentially benefiting from the return of premiums if they meet the rider’s conditions.
“The company gets health protection for a key employee, and the premiums aren’t a total write-off if nothing happens.”
Think about the risk-averse client
An ROP rider can be appealing to risk-averse clients, said Mitchell Singer, director of tax, retirement and estate planning services at Empire Life.
He compared the rider to a “0% GIC” combined with insurance protection; the client gives up the potential investment return on the additional premium in exchange for greater certainty about the possible outcomes.
That mindset is also common among some business owner clients, he said, who may be comfortable taking risk in their own businesses but less willing to do so in passive investments.
“They believe in themselves, but they don’t believe in the markets.”
From that client’s perspective, an ROP can make the insurance purchase feel less binary. If a covered event occurs and the policy conditions are met, the client receives the insurance benefit. If no claim is made and the ROP conditions are satisfied, eligible premiums are returned. The trade-off is the forgone use and potential investment growth of the additional premium.
ROP riders can also address a related concern: CI policies typically require the insured to survive covered conditions for 30 days to be eligible for a benefit payment.
“You could suffer one of the 25 illnesses and not survive the requisite time necessary to make a CI claim.”
Know how your clients think
The financial comparison alone may not settle the question because advisors also consider how clients behave, said Catherine Metzger-Silver, an advisor with Edward Jones in Kentville, N.S.
If a client is likely to cancel an insurance policy before the end of the term because they think premiums paid without a claim are “wasted,” an ROP on expiry rider, which only returns eligible premiums at the end of the policy’s term, may give them an additional reason to keep the coverage in force, she said.
But the rider can also create a behavioural drawback. A client who has accumulated enough wealth to self-insure may no longer need the policy but could be reluctant to cancel it because doing so would mean giving up a future ROP payment, Metzger-Silver said.
Similarly, an illustration showing that investing the premium difference could generate a higher return assumes the client will invest that money and stay invested, Metzger-Silver said.
“It comes down to discipline.”
Just as mortgage payments can function as a form of forced saving, the additional cost of a ROP rider can create similar discipline for a client who otherwise would not invest the difference, she added.
“You need to get inside your client’s head,” Metzger-Silver said. “If we’re not really walking beside our clients in their own heads, we’re not doing the best job that we can do.”