Foretell The Insurance Future By
By Douglas I. Friedman
You can foretell the insurance future by keeping track of new riders. The ideas presented in riders may become so popular that they are eventually added to the basic policy form, no longer relegated to an add-on.
So it is with the accelerated benefits rider. Developed to meet the need of terminally ill individuals, who need money during their lives, not at death, this rider has now been added free of charge to many existing policies as a standard policy provision.
The accelerated benefits rider shows an important role of riders in todays market: the insurance industry uses them to address new concerns of society.
But riders can also be used to correct errors, provide expanded benefits, address changes in tax laws, etc., after the policy has been issued. They do this by providing a simple method for making adjustments.
The so-called “tax law” rider is an example of that. When the motivation for a purchase may be taxes, if the tax law changes, the rationale for the purchase may also change; indeed, it may end. A rider can provide the client with alternatives, so that the policy is an attractive purchase, even if the tax law were to change.
Consider: Last survivor policies are often purchased for estate tax reasons. If the estate tax is repealed, there may be no need for death proceeds at the second death. But a “tax law” rider may permit the policy to be changed into a single life policy under certain circumstances. In that case, the rider may be added to all last survivor policies a company issues. The rider thus addresses a non-insurance need, thereby enabling the sale to be made.
Such adjustments may not always be global in nature, such as a change in the tax laws. Sometimes the adjustment is needed for a personal reason.
What if, for example, the insureds under a last survivor policy were to divorce? Again, the underlying rationale for the policy probably ends with the divorce. A rider in that case may permit the policy to be split into two individual policies. A rider for that possibility is now commonplace and may be added routinely to all of an insurers policies.
Or, what if the need for insurance itself changes? A rider may be added that would permit the purchase of additional insurance at specified times in the future, or upon the occurrence of particular events (such as the death of a spouse). While these riders usually require evidence of insurability, if theyre added at an early enough age, the insured is more likely to qualify, and the additional premium will be lower than later on.
An agents knowledge of products is essential to the proper use of riders. Most agents I know agree that riders rarely are the reason to buy a particular policy. Usually, they say, they recommend the best base policy to fit the customers need. Then, they may recommend a rider to address particular concerns the client raises in the course of the sale.
That way, adding the rider is a natural consequence of fact-finding and of listening to customer concerns.
Finally, drafting a rider in todays market may provide insurers with an easier route to a solution than rewriting a basic policy form. I have certainly found that to be so, while providing legal services to my insurer clients.
One reason is that the internal compliance review process at the insurer may be simpler for a rider than for a base policy. A rider designed for tax issues, for example, may not require the actuarial calculations for rates and values that are required for a base policy.
Also, filing for state approvals may be faster and easier because the regulators have a shorter form to review than is the case with a full policy form. And, of course, the content of the rider is usually limited to one issue, which also makes it easier to review.
Unlike casualty insurance, which the insurer usually has the right to end on a year-to-year basis, individual life insurance usually is guaranteed renewable and non-cancelable. So, if the policyowner pays the premium, the insurer must continue providing coverage. That is why, unlike casualty insurance, riders limiting liability may not be added to an individual life policy.
In sum, riders are a testing ground for determining whether buyers want a benefit or feature. They provide a method for adjusting to market changes after the policy is issued. And they can be a cost-effective way to add benefits or provisions without having to refile an entire policy with regulators, or subjecting the base policy to full internal compliance review.
Douglas I. Friedman, a partner in the Friedman & Pennington, P.C. law firm of Birmingham, Ala., is national counsel on estate and business planning for insurers. E-mail him at email@example.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, September 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.