Is The Industry Selling The Right Term Products?

Why is term insurance so inexpensive even with the recent rate increases by many carriers? Because only in rare cases does the death benefit ever pay out.

Statistics whispered throughout the industry say that less than 1% of term policies actually pay a death benefit. The other policies either lapse or are replaced with new coverage every few years.

But consumers want something of value, and if value is defined as “throwaway term” to protect against death for a limited period of time, then inexpensive term may be the answer.

And it’s always better to have some coverage than no coverage.

To achieve this goal, what about using a term contract that has a built-in savings plan that is guaranteed to pay out an annual return of 5.499% after 20 years? Doesn’t that sound enticing, especially to consumers in today’s economic environment?

But how can term provide a return of almost 5.5%? The answer is return of premium (ROP) term.

Currently, there are only a few insurance companies that have reasonably priced ROP term. But they exist and are worth considering for use in the current environment.

Here is the situation. Today’s small ROP term market is due to Actuarial Guideline CCC (officially, Actuarial Guideline 45). This guideline applies to individual life insurance products that offer endowment benefits (think ROP term) prior to the expiry date of the life insurance. It does not apply to universal life or variable life insurance.

So now, for the first time, clear nonforfeiture standards exist.

These standards generally increase the cash values that must be provided within the ROP term contracts at earlier durations. But since Actuarial Guideline CCC is effective for all forms filed on and after January 1, 2009 and for all policies issued on and after January 1, 2010, some insurance companies currently have a competitive advantage–if they are using an older policy form.

This competitive advantage goes away, however, starting January 1, 2010. At that time, all life insurers will effectively be on a level playing field, and they will increase ROP term premiums for consumers.