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.
Consider a short-term disability rider, which pays an income benefit if the insured becomes disabled. This offering certainly is not a substitute for a disability income policy.
In the rider, the benefit would typically be short term and would complement a waiver of premium benefit, although the disability income benefit would be of much shorter duration, possibly a year or less. The goal here is to help pay ongoing payments, such as mortgage payments, to cover financial complications arising from a short-term disability.
Next consider a critical illness rider. The rider provides a lump-sum benefit triggered by some serious contractually defined illnesses, including strokes, cancer and heart attacks. The benefit either can be independent of the base policy or it can be integrated with the base policy.
The latter are referred to as CI acceleration riders. In such products, the payment of the rider benefit reduces the base policy death benefit that would otherwise be payable. The acceleration rider is naturally cheaper because of the integrated approach.
Use the independent design if the full amount of the policy is needed as a death benefit even if critical illness occurs. This would be the case, for example, if the death benefit were used to pay taxes, or to provide value to heirs.
The long term care rider that is growing in popularity on UL and variable UL policy structures works just as well with traditional life policies. These are largely acceleration riders, reducing the death benefit as the LTC benefits are paid.
As part of a participating policy, the amount that can be paid out when there is a chronic illness can increase should the buyer purchase additional insurance (i.e., paid-up additions) with the base policy dividends.
The simpler LTC rider designs available today avoid many of the administrative complexities that were common in earlier designs. Most pay a “per diem” benefit that is independent of the LTC expenses actually incurred by the insured. This minimizes the aggravations associated with the claims process. The per diem benefit will, in the vast majority of situations, avoid any taxable consequences, and the consequences can be avoided by planning.
Riders such as these can enhance the popularity and staying power of participating products.