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Life Health > Life Insurance

Guarantees Take Many Forms In Life Products

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Guaranteed issue and return of premium products are distinct from each other, but both share the common element of offering guarantees in an era when guarantees are what the customer wants.

Chart I lists 3 entirely different return of premium products. Item 1–graded benefit life Insurance–is discussed later. Item 2–minimum death benefit in annuity accumulation products–is very common and has spawned variations such as minimum annuity benefit.

Item 3–eventual cash value if no claims have occurred–is showing up in long-term care products and in term life insurance. It is an expensive “best-of-all-worlds” feature, and can apparently be achieved only by lapse-based pricing (which is controversial).

All 3 types of ROP products have gained increased interest in recent years, as consumers continue to seek out secure options for their financial products. This appetite for guarantees was spawned by economic reverberations from the early 2000s recession and shows no sign of abating.

Not coincidentally, guaranteed issue products are also enjoying resurgent interest. This product category, with its promise to issue coverage to members of a group (and sometimes to individual buyers) is by no means new. But in a world where privacy concerns grow higher by the day and detection of medical problems occurs increasingly early and with greater detail, consumers find the idea of guarantee-to-issue immensely attractive.

(In this discussion, I am taking the liberty of including simplified issue products as well. They do require a minimal amount of underwriting, of course, but the products seem to be quite popular in today’s marketplace as most people can qualify with little problem).

Chart II ranks 5 products in order of severity of mortality experience. Surprisingly, one product–graded benefit life insurance–turns up on both charts.

An astonishing feature of all the Chart II products (except graded benefit life) is that executive, managerial and large-amount portions of this business exhibit far better mortality experience than the rest; this is a socio-economic phenomenon.

These products are actually subject to weak or no underwriting, and yet they are manageable for the insurer because many controls are available. Questionnaires always ask smoking status and other brief questions. The actively-at-work rule is common (30 hours per week at normal place of business).

About the large modern non-medical products: These use a lengthy non-medical questionnaire, but do not require doctor examination. In the old days, the maximum non-medical limit might have been $25,000; today, the industry is allowing $350,000 or more. This is a product for people in their middle ages.

About the simplified issue products: These products are for the younger-age, smaller face amount amount market. Often, but not always, they are worksite sold or related. They use very short health questionnaires. Some insurers are even experimenting with “instant issue,” using stored data that can legally be used. Research by my firm shows that there is tremendous interest just now in simplified issue.

About the not underwritten products: This is an exotic but manageable product line. It entails life insurance for mature ages (45+), offered in sizeable amounts (average $110,000, and even $300,000 for executives). The business controls have to be in place; for example, there should be an actively-at-work rule.

About the graded benefit life insurance products: Many people will recognize the television commercials for this popular product, featuring celebrities. The phrase goes, “You can’t be turned down.” That is a guarantee that’s aimed to draw buyer interest. The insurance is direct response; however, it is also sold by home service agents. It is a product for older ages (maybe in their 70s). It has a valid place because many seniors are unwilling to submit to health questions. However, the product is feasible only if the death benefit is limited, for 2 or 3 years, to return of premium only, or very little more.

To conclude: Members of the public want guarantees. The life insurance industry is responding in various ways, from return of premium to guaranteed and simplified issue products.


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