It is one of the time-honored sayings in the insurance industry that the 2 major opposing concerns its products address are: living too long, thus outliving one’s resources, or dying too soon and not providing needed assets for survivors.
These concerns are no less true for the host of baby boomers now reaching retirement; there are only more of them worrying about these 2 concerns. Moreover, for the boomers, economic reality may preclude hedging the risks by buying both an annuity and a life insurance policy.
Issuers of variable life insurance policies appear to have recognized these concerns. In response, they are seeking to address them by offering a variety of new riders for their life insurance products.
These riders fall generally into the following categories:
–General no-lapse protection.
–Specific loan lapse protection.
–Death benefit guarantee.
–Surrender charge modification.
–Cash value protection.
–Minimum distribution guarantee.
–Minimum earnings guarantee.
Each company’s design has variations that make complete descriptions of these types of riders impractical.
It is relevant to note for this discussion that the loan lapse protection, minimum distribution, minimum earnings protections and cash value protection generally require initial or subsequent allocations, or reallocations to specific investment options and the general account.
In addition, as may be expected, certain riders interact with or replace the base policy provisions if elected or exercised.
Finally, as a common occurrence, the charges for these riders are derived by formulas that refer to bases, factors or tables as opposed to the proverbial policy account value or the specified amount.
I’ve been studying a selection of these policies for clients. What has become apparent to me is that the interaction with the base policy is the expected consequence of two factors: 1) having riders that will address the opposing concerns of baby boomers, and 2) providing the opportunity for boomers to change direction without changing horses as insurance needs change.
The allocation requirements are risk-management tools for the insurers; they have been designed to be consistent with the policies’ provision of cash value, death benefit or other guarantees.
The charge structures vary from the proverbial in much the same way as the charge structure on guaranteed withdrawal benefits on annuity contracts are based on a computed benefit base rather than on a value that the owner sees as a policy value.
The two attributes–the required allocations and the interaction with the base policy–predictably have generated an increased review focus by the Securities and Exchange Commission staff.
The required allocations are an old issue for the staff. The issue reflects the staff’s lack of appreciation that such allocations are a risk-management tool for the insurer. The elevated level of scrutiny has been further prompted by the enlarged fee table disclosure for these products and the differing, and sometimes complex methods, for assessing fees and charges depending on the nature of the rider.
While the SEC staff has been cooperative in addressing comments, the review process is being slowed by the staff’s unfamiliarity with these forms of riders. Moreover, the perceived interaction of the riders with the base policy has further slowed, if not eliminated, any expedited review of substantially similar policies with alternative mixes of riders.
There are techniques and responses that minimize review delays. The first step is to make the initial filing as complete as possible. The more complete and plain-English the rider descriptions are, the faster the SEC staffer can learn about them.
Second, it is helpful to provide descriptions about to whom and why these riders should have appeal. As one senior SEC staff member has recently expressed it: “If I don’t know if I would want to buy this, how can the average investor make an informed decision?”
Thus, the key to speed to effectiveness is PPP: plain-English, patience and persistence.
Joan E. Boros, Esq., is a partner in the Jorden Burt LLP law firm, Washington, D.C. Her e-mail address is JEB@ jordenusa.com.