Much has been written concerning the new 2001 Commissioners Standard Ordinary valuation table, but the complete story is not yet out on the effect the new table will have on insurance products.
Will life insurance products change because of the table? In particular, how might the table affect universal life policies? Lets see.
The 2001 CSO valuation table will impact new UL policies in many areas that will affect consumers. These areas include: maximum cost of insurance charges, maximum surrender charges and Guideline Premiums (i.e., the maximum premium levels payable into most UL policies). This is so, whether the policy is a general account or a variable universal life contract.
ULs that have already been issued will generally not be affected.
To illustrate, consider a $500,000 UL written on a male nonsmoker, issue age 45.
Maximum cost of insurance charges is usually based on the valuation table (the table an insurance company uses to calculate policy reserves). This is actually required by a few states.
Because the mortality rates in the 2001 CSO valuation table are generally 30% less than in the 1980 CSO valuation table, the maximum cost of insurance charges are also expected to fall. For our sample policy, the initial maximum monthly mortality charge of $138 based on the 1980 CSO valuation table reduces by $41, to $97 based on the 2001 CSO valuation table.
Most ULs charge a mortality rate somewhat less than the guaranteed rates. Nevertheless, most current mortality charges will be greater than the new maximums, resulting in a reduction in the current mortality rates.
Similar to cost of insurance charges, the maximum allowable surrender charges will also start falling. The initial maximum surrender charge for our sample UL will drop from $13,990 to $12,340, for instance, for a reduction of $1,650.
Will these reductions in charges make the policies perform better? Probably not.
Thats because UL will likely be repriced in such a way that expenses, once covered by larger mortality charges and larger surrender charges, will now be covered by other expense loads in the policies. For example, the monthly load per policy, per unit, or as a percentage of premium may be increased to make up for the shortfall. The result will be a policy that performs similarly as under the 1980 CSO.
A more significant change will be the reduction in the Guideline Premiums.
These are the maximum single and annual premiums that may, according to law, be paid into a policy in order to continue its status as a life insurance contract. The 2001 CSO valuation table will reduce the Guideline Premiums by 10% to 30% from their 1980 CSO levels.
For fully funded policies, consumers will be forced to increase the insurance amount in their policies once the 2001 CSO becomes effective. The chart on this page shows the Guideline Premium reduction for our sample policy.
It is likely that the National Association of Insurance Commissioners, Kansas City, Mo., will approve the 2001 CSO valuation table either in September or December of this year. Shortly thereafter, the states will begin approving the table for use by insurance companies.
Once a few states have approved the table, many insurers will begin using the table for products they sell in those states.
As you can see, the 2001 CSO will have very little effect on UL in one way, but a substantial effect in another way. The product values themselves will probably change little as cost of insurance charges, surrender charges and policy expense loads are adjusted. But the dramatic change in Guideline Premiums may have a substantial effect on consumers wishing to heavily fund their policies.
Because the new table will lower the funding limits through the lower Guideline Premiums, in the next year, we may well see an increase in UL policies that are heavily funded, as buyers and their advisors attempt to beat the deadline for implementation of the 2001 CSO valuation table.
Kent C. Scheiwe is an actuary in the Indianapolis, Ind. Office of Milliman USA. His e-mail is [email protected]
Reproduced from National Underwriter Life & Health/Financial Services Edition, July 15, 2002. Copyright 2002 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.