Of The New 2001 CSO Table
Once the 2001 Commissioners Standard Ordinary Mortality Table is approved for use in a few states, insurance companies will begin revamping their insurance products using the new table.
Companies may also take this opportunity to look at their policy riders to determine if premium changes should be made. This article discusses possible changes to policy riders.
The 2001 CSO Mortality Table is a “valuation mortality table,” meaning its primary purpose is to determine the mortality risk when calculating insurance company reserves. As such, the table will only affect riders that have mortality risk.
For example, the table will affect term insurance riders on the base insured, spouse, child, or other insureds. It will also affect most annuity riders, disability income insurance riders, and long term care insurance riders.
Term insurance riders are affected because of the obvious mortality risk, while annuity riders are affected only if they pay a benefit upon death. Disability income riders and long term care riders are affected because benefits are generally discontinued upon death.
Other ancillary riders, such as waiver of premium and accidental death benefit riders, will be somewhat affected, but probably not enough to merit any premium changes for these riders. The reserves for these riders will change slightly, but companies are not expected to use this small reserve change as an opportunity to adjust premium rates.
Term insurance riders on the base insured, spouse, child, or other insureds can be attached to either traditional life policies or to universal life policies.
The effect of the 2001 CSO Mortality Table on term insurance riders for traditional life policies is to allow for lower statutory reserves. This is especially the case if the rider has long, level premium guarantees similar to a 20- or 30-year level premium term policy. These lower reserves will allow for lower premiums.
If the rider is of the annual renewable term type, the reserves will be changing little, and the premiums may be adjusted only slightly due to the new table.
Term insurance riders on the base insured on universal life policies are designed to coordinate with the base policy in one of two methods.
In one method, the insurance amount of the base policy and term rider are added together when meeting the definition of life insurance as defined in Section 7702 of the Internal Revenue Code.
Alternatively, the term rider remains separate from the base policy when meeting the definition of life insurance.
This is significant when considering the new mortality table, because Section 7702 Guideline Premium limits and corridor factors for the Cash Value Accumulation test are changing significantly due to the new mortality table. With Guideline Single and Annual Premiums decreasing about 15% (when assuming a level death benefit), and Guideline Annual Premiums decreasing about 30% (when assuming an increasing death benefit), the term riders will be affected because of being included with the base policy for Section 7702 purposes.
As a result, less money may be put into combination term/base UL policies.
Term riders combined with the base policy will also be affected if the Cash Value Accumulation test is assumed, since corridor factors will increase about 15%.
With either term insurance rider design for UL, the rider will be affected by lower maximum cost of insurance rates.
The maximum rates are generally set to the current CSO table, due to insurance department restrictions. With the 2001 CSO Mortality Table rates being generally 30% to 60% lower than the 1980 CSO Mortality Table, the cost of insurance rates may be forced down by the new maximums.
With lower cost of insurance charges, the insurance company will likely increase other charges to make up the difference or be willing to accept a lower profit margin.
Annuity and disability income riders will be little affected by the 2001 CSO Mortality Table, however. The mortality risk in these riders is not significant.
What about long term care riders? The 2001 CSO Mortality Table may significantly affect these riders. Benefits for these riders are generally provided at older age, when mortality rates are also high. Reserves for these benefits could increase due to insureds living longer (according to the new table) and receiving additional long term care benefits.
Furthermore, the new table could hurt the profitability of current LTC riders, resulting in insurance companies increasing the rider rates.
As you can see, the 2001 CSO Mortality Table will benefit some riders and hurt others. It will be interesting to see how quickly companies react to the new tables and adjust the rates on their policy riders, if at all.
is a consulting actuary in the Indianapolis, Ind. office of Milliman USA. His e-mail address is email@example.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, September 2, 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.