Small Face Amount Debate Goes On As Texas Readies Report
How much is too much for consumers of modest means to pay for a policy with a small death benefit?
The debate going on in Texas right now reflects how regulators and legislators nationwide are grappling for the right answer to how many times face amount a consumer should pay for a policy.
And, as the Texas insurance department readies a report for the states legislature due at year-end, the answer may be more intuitive than specific, interviews suggest.
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The report is in response to H.B. 2415, legislation signed into law in June 2001 that requires a report on the issue to be delivered to the Texas legislature by year-end 2002.
In fact, a number of possible answers are being floated. Disclosure, cost control, banning the sale of small face amount policies, and limiting the number of times premium can exceed face amount are just some of the starting points being deliberated.
During a series of hearings this year, consumer advocates have raised possibilities including premium caps and offering policies other than guaranteed issue.
Mike Boerner, a life actuary with the Texas insurance department, who is helping to spearhead the effort, says that personally he thinks that proper disclosure could be a solution. “Information never hurts unless it is too costly.” And, he adds, that in this case, disclosure would not need to be too costly.
The next question, he adds, is what kind of disclosure should be required?
One possibility, he says, would be to inform potential policyholders of what they may pay relative to face amounts received in the future.
But there are other possibilities that could be explored, he adds.
Picking up on the idea broached during hearings, Boerner says that potential policyholders who are in good health could be advised that a guaranteed issue feature may not be necessary.
A guaranteed issue feature ensures that the contract will be issued but includes the cost of the companys risk of not underwriting in the contract.
Another possible solution that has received discussion, he says, is to cap the multiples of premiums that could be paid on a small death benefit policy. But, he cautions, the “con on a cap would be that it is hard to find a one-size-fits-all that works.”
Lapse rates, he says, tend to be approximately 50% over the first couple of years that a policy is in force, so those who keep a policy in force longer end up paying more of the costs related to a policy block of business.
One solution may be to lower cost through distribution such as Internet marketing, he adds. Results from a survey done by the Texas department indicate that there is potential to hold down expenses.
But then, for companies, the question becomes one of whether such distribution will make it possible to reach target markets, he continues.
Leslie Jones, who is with the South Carolina insurance department and is chair of a subgroup that is looking at the small face amount policy issue, says there could at the very least be an option to fund the contract using a reduced number of premium payments.
If products are appropriately priced, then it is a matter of disclosure but if they are inappropriately priced, then a stricter approach is needed, she says.
In general, Jones continues, it is better not to limit product offerings, but instead, to make sure that consumers know what they are buying and that product features are fair.