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Insurance Basics Will Drive Products In The Future

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In 2008, consumers and investors alike experienced unprecedented volatility and loss of confidence in most sectors of the American financial system. Illusions driving business decisions came face to face with the realities of economics.

Insurers were not immune to the economic environment, especially those who invested in the “wrong” instruments or priced their products using “normal” market scenarios. Still, many, if not most, are faring reasonably well in this environment–because they have adhered to the basics of the business.

What are these basics? From one perspective, insurance basics provide protection against the financial effects of unforeseen events, or other events with a serious financial consequence. They are either mortality or morbidity driven.

Insurers have moved through periods of time during which investment performance, especially in conjunction with favorable tax treatment, was the primary driver. At other times, insurers have focused on assuring that a benefit would be provided, and in contracts with an investment element, they chose not to focus on the high yield, but rather on the absence of volatility. (“You can sleep at night”…)

In the future, it is likely that many insurers will place a much greater emphasis on such protection-oriented offerings. Guarantees will be of utmost importance.

What’s available today? And what is likely to be available in the not too distant future?

For starters, term insurance (i.e., a high protection coverage) coupled with return of premium (ROP) coverage looks like a pretty good bet.

The premium for such insurance will increase modestly over that available in past years, due to the impact of a new nonforfeiture regulation that becomes fully effective in 2010, but which will have some impact already in 2009. However, the product does combine low-cost term insurance with an attractive ROP feature.

The traditional argument against such designs is that insureds can take the extra cost of the ROP feature and “invest” it. While that works just fine for many, for others the receipt of a significant sum of money after 20 or 30 years of premium payments provides a meaningful cash windfall that can be fruitfully used for other useful, non-consumer expenditure purposes. Besides, as highlighted above, 2008′s stock market performance may turn some away from investing in the near term.

As an example, for a male age 35 standard (not preferred) class, the premium for $250,000 of 30-year term plus ROP is about $930. Therefore the ROP amount comes out to about $28,000–a considerable sum for most people.

What makes this interesting for insurers is that the policy persistency can be excellent for ROP plans. Under the revised designs that will be appearing before long, the cash value scale will no longer be as steep as it is currently. In other words, early cash values will be higher. Still, persistency should remain very high.

What makes this more than interesting for both insureds and insurers is that the money payable at the end of the term can be put to good use for protection products that reflect the insured’s changed situation at the end of the term. These products can include long term care insurance, for example.

Further, if the ROP period was shorter than 30 years, or if the issue age was pretty low, there might be a need for either disability or critical illness insurance.

Alternatively, insureds might put the proceeds to good use by purchasing either an immediate or deferred annuity. Actually, either the immediate or deferred annuity design will soon be available with LTC features that will leverage the amount of the proceeds, combining the attributes of the annuity and the LTC efficiently in one vehicle. (Some offerings already exist.)

Cary Lakenbach, FSA, MAAA, CLU, is president of Actuarial Strategies, Inc., Bloomfield, Conn. E-mail him at [email protected]


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