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New Mortality Tables Will Change Life

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New mortality tables, the 2001 CSO tables, are on the brink of becoming the new measure for product reserving, a fact that will have varying impacts on life insurance products and their sales.

Counts on how many states have adopted the 2001 CSO Tables range from 24 to 26. Twenty-six states are needed before the tables become the prevailing mortality tables used by the Internal Revenue Service and the life insurance industry.

The new tables will apply to new sales of life insurance. The new tables could impact the cash values allowed in certain products and what is considered life insurance, according to interviews.

Jim Van Elsen of Van Elsen Consulting, Pella, Iowa, an actuary who was involved in the development of the tables, explained what the new tables could mean for different products.

Term insurance is “already dirt cheap,” he says, so there should not be a major impact on price. However, the tables should lower reserves, and lower reserves may reduce the need for reinsurance, Van Elsen adds.

Some companies, he says, are deciding to maintain the same rates and lengthen their guarantees for term products.

Whole life products could see a reduction of premiums but also a reduction of dividends paid, Van Elsen continues.

But universal life is “just going to be a mess,” Van Elsen says. “Companies will have to be creative just to make the product even marketable.” UL will have less cash value accumulation and will become more like term insurance, he says.

In general, he continues, “you will see actuaries tinkering with products.” However, he says, it should benefit consumers and companies.

Insurers contacted by National Underwriter explained what the adoption will mean to them.

Savings Bank Life Insurance Company, Woburn, Mass., which offers level term, was able to reduce rates from 3% to more than 40% in some cases, says Robert Sheridan, president and CEO. For instance, SBLI says the annual premium for a $500,000 20-year level term non-nicotine contract for a 40-year-old went from $425 in 1999 to $340 in 2004. The 1999 premium was before the advent of the Valuation of Life Insurance Policies model regulation, known as Guideline Triple-X. The 2004 rate is multi-class preferred plus.

In fourth-quarter 2003, SBLI readied its products for the change, he continues. Direct sales, which represent 85% of its business, saw leads increase to 9,300 in March 2004 up from its previous monthly high of 7,000, according to Sheridan. Conversions to sales were close to 50% in March compared with an average ranging from 4,000 to 5,000 a month, he adds.

Mel Feinberg, a senior vice president, individual insurance department with New York Life Insurance Company, says once the new tables take effect, life insurers still will need clarification from the Treasury Department on points such as the definition of life insurance and what constitutes a material change in a contract.

For instance, a material change might be considered the conversion of term insurance to permanent insurance, he says, and a minor change could be an improvement in a risk class if someone improved their health. But, he adds, that still needs to be stated by Treasury.

Overall, with the exception of some classes such as female smokers, there should be a moderate improvement in mortality, Feinberg says. Long-term guarantees such as term with 30-year guarantees could be affected, but in New York Lifes case, it offers guarantees of up to 10 years, he adds.

The cash accumulation allowed for variable life and whole life products will change modestly with more premium used to cover a pure death benefit, Feinberg continues.

Products targeting older age consumers may see some benefit, he says; for example, a UL contract will no longer need a life extension benefit.

Bill Schreiner, a life actuary with the American Council of Life Insurers, Washington, says the new table clears up potential tax issues because it now extends to age 120 rather than age 100. In the past, if the value of the contract was not paid out as a death benefit, a tax question was raised, he adds. This wont be the case with the new tables.

In most cases, the new tables will lower reserves as well as tax deductions for companies, says Schreiner, who was also involved with the development of the tables.

What is important for life insurers, he says, is that the new tables be uniformly adopted. He says that 24 states have adopted it so far, and another 6 states are actively looking at it. The NAIC is giving companies until 2009 to put the tables into effect, but for federal tax purposes, there is a 3-year phase-in starting in the year 26 states adopt it.

Uniformity is important, New York Lifes Feinberg concurs. If a company offers a product in a state that has not adopted the tables, then that company could be required to hold reserves for all of that product sold, both in and out of the state, at the higher 1980 CSO table levels, he explains.

A company would have the option of filing a separate annual statement in a state that had not adopted the new tables, which is a complicated process, he continues.

The good news, according to Feinberg, is that even if states adopt the tables at mid-year, they are usually made retroactive to the first of the year, creating more uniformity.

Van Elsen says there is another piece of good news, which is that he has not heard of any state that is not considering the new tables.

Reproduced from National Underwriter Edition, April 30, 2004. Copyright 2004 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.