The other day, a mutual company actuary posed a number of questions to me regarding the pricing of participating (i.e., dividend-paying) life insurance products. This particular company, like many others, is repricing its portfolio for the new mandated 2001 CSO Mortality Tables.
One thing led to another, and we talked briefly about riders to the portfolio. As a former mutual company actuary with a fair share of experience in the product segment, I was struck by the innovation opportunity with respect to riders and enhanced features. That’s especially true as the new mortality table has lowered the price of whole life policies.
The underlying philosophy of the riders is that the policy will cover you if you die (the core policy feature), if you are disabled or if you live.
So, here are a few ideas for those innovations.
Both term and universal life policies, term policies especially, have prospered by offering return of premium (ROP) features that promise all the premiums will be returned if the client survives to a specific duration.
There’s no reason that a participating plan can’t offer a similar feature. One could integrate the design with the dividend-paying characteristic of the rider, thus making the rider relatively inexpensive. In such case, the benefit provides assurance that is equivalent to saying the dividends will at least equal the premiums paid.
Alternatively, the ROP benefit could be independent of the dividend feature. Consequently, the benefit provides a return of premiums paid.
In both instances, care must be taken to comply with nonforfeiture and definition of life requirements.
Here’s one more alternative: Add a level term rider to the policy, with its own ROP feature. The ROP feature can be used either to enhance the base policy values or to pay out in cash at the end of the term.
This feature responds if the insured lives. Now, let’s address the alternatives if the insured becomes disabled.