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Life Product Guarantees Lead Industry Innovation

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In today’s market, new and innovative life insurance product designs with guarantees continue to be introduced.

The spur was universal life with long-term no-lapse guarantees. As sales of this product grew in the older age and more affluent markets, carriers started looking at other approaches, levels and types of guarantees.

One of the first of the newer guarantees was return of premium (ROP) term. Primarily targeted at middle market customers, this guarantees that at the end of the level premium period (typically 15, 20 or 30 years), the policy will either have paid a death benefit to the beneficiary or will return to the policyowner the premiums paid under the plan. This uniquely addresses a common objection–namely, that in most cases no benefits will be paid out under the term policy, essentially “wasting” the premiums paid.

Even in the case of plain vanilla level premium term sales, the ROP option gives producers an additional story to tell. They can present the ROP feature but also show an alternative and significantly decreased cost under the non-ROP option.

This product has gained momentum over the past 3 years, with several new carriers entering the market since 2003. ROP term is still a niche product but a few writers have had significant sales gains, especially in the mortgage protection market.

Based on a recent LIMRA survey of the term insurance marketplace, policies issued with an ROP guarantee represented 10%-15% of new term premium in 2005 with just under 50% of ROP sales in the 30-year level premium plans (see Figure 1).

The much discussed flight to guarantees has also led to increased interest in existing niche products.

Equity indexed UL (IUL) policies have been offered by a handful of carriers for many years. However, since the equities market decline in late 2000 and the resulting demand for strong policy guarantees from both consumers and producers, IUL availability and success have grown dramatically. These products provide potential for higher returns through equity market participation, but with significant downside protection via guaranteed credited rates (now in the 1%-2% range). Newer versions also offer long term no lapse guarantees.

Administering an IUL line entails substantial cost. Therefore, the products seem, so far, to be a better fit for carriers having established equity indexed annuity operations and potential economies of scale.

The latest new frontier for life carriers looking to grow through innovation is life insurance with living benefits.

Today’s consumers have multiple financial risks that need to be addressed but limited disposable income to spend on insurance and other financial services products. In this environment, packaging life insurance with other types of benefits has potential appeal.

The cutting edge response falls into two categories: variable life with variable annuity type guarantees, and life insurance/health insurance combination products.

Based on information reported to LIMRA in a 2005 study of UL and variable UL insurance, over 20 carriers now offer at least one variable life product with a long term no lapse guarantee. In some cases, these guarantees involve significant investment restriction (for some, minimum premiums must be deposited to the fixed account). In other cases, they involve minimal or no investment restriction.

In addition, some insurers have added riders that offer variable annuity type guarantees including guaranteed minimum withdrawal and guaranteed minimum accumulation benefits. This reflects an effort to make the products more marketable in the retirement income planning arena.

Although companies still report minimal sales of the newer riders, as in the case of ROP term, the riders may serve as an opening for variable life producers by providing an opportunity to discuss some of the investment safeguards now available in the marketplace.

As with the variable life products with annuity-type guarantees, the life/health combination plans are currently being offered by a relatively small portion of the life insurance industry.

Targeted to more affluent customers, the life with long term care combos have been the most popular. There are two basic designs, usually with a UL product chassis. This makes sense from a marketing perspective, in that UL buyers tend to be older than VUL buyers and therefore more concerned about LTC coverage.

Under the first basic design, life insurance and LTC benefits are available and paid for through the base policy premium. Under the second approach, the LTC benefits are provided through an acceleration of the base plan death benefit and paid for through separate rider charge.

Other life/health products currently being sold include life/critical illness and life/disability income combinations.

Life insurance plans with optional CI riders that offer a lump sum benefit in the event the insured experiences one of a list of covered conditions have mostly been marketed by companies that have a strong middle market focus.

Again, these products often provide a lump sum payout through accelerating payment of the base policy death benefit. However, in some cases, the rider only pays a benefit upon diagnosis of one of a short list of covered conditions, while a more comprehensive CI plan will make payment upon diagnosis of any one of 25 or more covered illnesses.

Life products with DI protection riders are also being offered by middle market-focused carriers. However, these products are more commonly used with term products for the mortgage protection arena (where concerns about impact of disability and unemployment on the insured’s ability to meet mortgage obligations could make the optional DI rider more attractive).

As with the LTC and CI combination products, the life/DI products offer more limited disability benefits than would be available under standalone plans. Typically, buyers can purchase DI benefits that are paid for 2 years after a 180-day elimination period.

Product innovation has never been a dominant feature of the life insurance industry. In fact, many carriers consciously prefer to follow rather than lead in the product development arena–sometimes for good reason, since product innovators are taking on new types of risks.

For instance, innovators may have to set key pricing assumptions based on sparse current experience (i.e., older age mortality and lapse experience under no-lapse guarantee, long term level premium term and return of premium term policies). They also need to follow closely the course of regulatory, tax and legal trends, where unanticipated changes can affect both carriers and policyholders with life/health and other combined benefit plans. Finally, they need to address suitability and customer understanding about the guaranteed and non-guaranteed elements of indexed and no-lapse guarantee UL policies.

However, the number of new product designs, new approaches to packaging benefits and especially new types of guarantees introduced has made the past 5 years rather remarkable from an historical perspective. These innovative ideas, along with opportunities presented by the new Pension Protection Act of 2006, may help open up new avenues in what has been a relatively slow-growth market for over 20 years.


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