In today’s competitive financial landscape, life insurance plays a vital role in a financial advisor’s toolkit, particularly when customized to address the complex needs of high-net-worth clients. One standout strategy is a return of premium (ROP) death benefit, which offers robust protection and can enhance the overall value of a client’s estate. 

This option is especially attractive to clients who want to safeguard their wealth while ensuring that every dollar they invest in premiums is returned to their beneficiaries. It is an effective solution for balancing protection and long-term financial growth.

What is an ROP death benefit?

An ROP death benefit is a feature in some life insurance policies that increases the death benefit in proportion to the premiums paid over time. It allows clients to recoup the full amount of premiums they’ve paid into their policy upon their passing—on top of the base death benefit. 

Essentially, it provides a return on their investment through an enhanced payout to beneficiaries. Typically, an ROP death benefit works very well for clients making large initial payments, such as through a 1035 exchange or a cash lump sum. 

How can clients benefit from an ROP death benefit?

Maximizing the estate’s value

For clients focused on estate planning, an ROP death benefit helps maximize the value passed on to their heirs. Instead of simply receiving the base death benefit, beneficiaries will receive both the policy’s face value and the total premiums paid. This creates a larger legacy with a greater financial impact.

For example, let's say a client funds a $1 million life insurance policy with $500,000 from a 1035 exchange. Over the next ten years, the client will pay $25,000 annually, totaling $250,000 in premiums. 

With an ROP feature, the client’s beneficiaries would receive the original $1 million death benefit and the full return of the $750,000 ($500,000 from the 1035 exchange and $250,000 in premiums). Their heirs would receive a total payout of $1.75 million, combining the base death benefit with the return of premiums.

Lower initial death benefit for cash value growth

In some cases, clients can start with a lower initial death benefit. This can reduce upfront charges, leading to improved cash value accumulation in the policy's early years. As premiums are paid, the death benefit grows, ensuring that clients ultimately leave a larger amount behind without a high initial cost. This makes the ROP strategy ideal for those seeking long-term wealth preservation.

Flexibility in structuring premium payments

The ROP death benefit works well for clients making significant one-time payments or using a 1035 exchange to fund their policy. The ROP's flexibility allows for growth over time, even if a client prefers lower initial payments. As they continue contributing to the policy, the death benefit increases, making it a versatile tool for various financial situations. This also helps to increase the overall internal rate of return (IRR) over the life of the policy.  

Estate tax implications

Even though the death benefit, including the ROP portion, is generally income tax-free, it may still be subject to estate tax if the policyholder's estate exceeds the federal estate tax exemption. As of 2024, the federal estate tax exemption is $13.61 million per individual and $27.22 million for married couples. However, this is expected to sunset at the end of 2025, with the exemption levels being cut in half, adjusted for inflation. 

There are also proposed changes to the estate tax landscape outlined in the American Housing and Economic Mobility Act (AHEMA) of 2024. If passed, AHEMA could reduce the estate tax exemption to $3.5 million per person. However, the legislation hasn’t been finalized yet.

Additionally, suppose the policyholder retains "incidents of ownership" (e.g., the right to change beneficiaries, borrow against the policy, or surrender it). In that case, the death benefit, including any premiums returned via the ROP feature, will be included in the policyholder’s taxable estate.

To avoid estate tax inclusion, clients may transfer ownership of the policy to an irrevocable life insurance trust (ILIT). This strategy allows the death benefit and the returned premiums to be paid out of the estate, reducing the taxable estate and maximizing the benefit to heirs.

Presenting an ROP death benefit strategy to clients

Advisors can effectively introduce the ROP death benefit strategy by addressing the client’s long-term financial goals and highlighting how this feature complements their broader estate plan. 

Focus on legacy and guarantees

A client concerned about the opportunity cost of paying premiums might appreciate knowing that every dollar they invest will eventually be returned to their heirs, providing both peace of mind and financial security. Emphasize how this feature guarantees that all premiums invested will be returned to their beneficiaries in addition to the standard death benefit. 

Show the cash value growth potential

If the client is interested in both cash value and death benefit protection, explain how the ROP design allows for greater cash value growth early on. Lower initial death benefits and charges can lead to enhanced policy performance, especially compared to more traditional options that might tie up cash value in the early years.

Tailor the presentation to clients with large upfront payments

The ROP feature can be a great fit for clients using lump sums or 1035 exchanges to fund their policies. Highlight how the return of premium will make the most of their initial investment while allowing for an eventual larger payout that increases as premiums are paid over time.

Final thoughts

A return of premium (ROP) death benefit is a valuable tool for life insurance and financial advisors looking to enhance their clients’ estate planning strategies. By offering a larger legacy with lower upfront costs, this option can be particularly attractive for high-net-worth clients who want to maximize their policy’s value while minimizing risks. 

Next steps

Now is the time to review your client portfolios and determine who could benefit from an ROP death benefit, especially in light of recent and upcoming tax reforms. Staying proactive will help your clients preserve their wealth for future generations.

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