Texas Legislators Say Small Face Bills Likely To Be Introduced

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At least one Texas legislator anticipates that it is likely legislation will be introduced to put an end to the situation where premium payments exceed face amounts by many multiples.

The Texas insurance department recently concluded an investigation into how premium payments on small face amount policies can exceed face amounts by as much as nine times or more. The state legislature at the behest of State Sen. Rodney Ellis, D-Houston, and State Rep. Helen Giddings, D-Dallas, last year passed legislation, HB 2415, requiring the investigation.

The departments completed report, presented by Texas Insurance Commissioner Jose Montemayor on Dec. 30, made 10 recommendations. Heading the list is a call for legislation prohibiting insurers from collecting premiums minus dividends in excess of 250% of the death benefit.

A related but alternate suggestion capped premium payments by age as follows: age 0-20, 150%; age 45, 250%; age 65-85, 350%; and, issue age 99, 100%.

The list of recommendations also calls for offering consumers the option of shorter premium paying periods. “By shortening the premium paying period,” the deparment says, “dramatic reductions in multiples can be achieved in exchange for relatively modest increases in premium.”

Other recommendations include prohibiting the sale of life insurance policies with an initial face amount of $2,000 or less, unless a policyholder could increase the death benefit to an amount up to $15,000.

Additionally, the report calls for insurers to disclose to an insured and/or policy owner, the relationship of premiums to death benefit, if premiums may exceed the face amount of the policy. The minimum disclosure standard recommended addresses death benefit, annual premium paid, cash value and the year in which cumulative premiums will exceed the face amount of the policy.

Rep. Giddings says the recommendations offer “a pretty good balance” to address an issue that she says consumers have complained about repeatedly. “Weve had lots and lots of complaints. If there is one case, it is one case too many,” Giddings says.

Requiring a cap of two and a half times face amount is “pretty fair” compared with multiples that can be up to nine times face amount, she adds.

Giddings says she believes legislation will be introduced to address the issue.

Mike Lavigne, a spokesman for State Sen. Ellis, says the recommendations are “good” and that legislation will be drafted as one or several bills.

In a letter accompanying his departments recommendations, Montemayor writes that “for many Texans, the relationship between the pricing of small face amount life insurance and the value they receive is not reasonable.”

Montemayor continues, “Given that SALI policies are frequently marketed to the most vulnerable Texans–the poor, the uneducated and the elderly–disclosure alone may be inadequate to address the imbalance between premium paid and value received which can occur in this market.”

Insurers are expressing disappointment over the recommendations presented by the department.

“ACLI is concerned with the commissioners findings and recommendations and is waiting for bills to be filed,” says Sarah Bohn, a spokesperson for the American Council of Life Insurers, Washington.

Consumers who just want enough for a simple burial or a cremation will be denied policies that could achieve that goal, according to Scott Cipinko, executive director of the Life Insurers Council, Atlanta.

“The market is going to go away,” he adds. “If it does go through, there will be an awful lot of people without insurance coverage because policies wont be sold.

“Whos going to bury these people?,” he asks. “The state of Texas?”

Disclosure, according to Cipinko, is a good solution, but “regulating life insurance rates is a bad move.” Rate regulation causes problems in the market, Cipinko says, referring to the health market in Kentucky.

As part of its mandate, the Texas legislature said the insurance department had to investigate whether:

the relationship between the pricing of SALI policies and the value received by insureds is reasonable;

actuarial and expense experience supports the pricing of SALI policies;

adequate disclosure is made to consumers;

the sale of multiple policies to one insured is appropriate and suitable; and

statutory changes are needed or desirable.

The National Association of Insurance Commissioners, Kansas City, Mo., is also examining the issue of small face amount policies.


Reproduced from National Underwriter Life & Health/Financial Services Edition, January 27, 2003. Copyright 2003 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.