Perhaps it is to be expected that the most economical form of life insurance–term life–would enjoy sales success in today’s tough times. However, this product is capable of much more than the insurance industry has allowed it to achieve.
For many carriers and agents, term life is simply an accommodation; a fallback product to offer when a customer cannot afford a more expensive product or is looking for the least expensive life coverage. In many such situations, carriers and agents reluctantly sell the term plan (usually level term) and resign themselves to razor-thin profit margins and lukewarm commissions. These in-force term plans often are then put on autopilot, with little remarketing or needs re-assessment before a claim is made or the inevitable lapse occurs (when premiums spike after the level premium period ends).
Unfortunately, this pattern ignores a basic, but key point–that selling a term product establishes a client/agent and client/insurer relationship that has value beyond the value of the term life sale.
Some carriers do an excellent job of offering attractive term conversion options to permanent plans, but others do not. Further, the timing and creativity of conversion offerings are often limited or poorly planned and designed.
Conversion offers could present greater value if triggered at defined anniversaries or at specified life events or attained ages.
And why can’t term contracts be exchanged for other term products, perhaps with longer level premium periods or return of premium provisions? This may be viewed as an exchange, not a conversion, but that is just semantics.
Split conversions could be more prominently offered, too, where a portion of the term coverage is converted to higher premium permanent coverage and the remainder stays as term.
The point is, once the customer relationship exists, offering additional benefits, often with higher premiums, can be beneficial to all. This is especially appealing as sales of term and other life products drift upward to older issue ages.
Level term premium structures after issue need revisiting, also. In the past, it made sense for actuaries to craft large premium increases at the end of the level premium period in order to minimize statutory reserves and cash values. Emerging regulations are making such approaches less compelling. Dramatic premium increases today force healthy lives to lapse the term plan either immediately when the premium spikes or shortly thereafter. The insured pool remaining after these lapses experiences poorer mortality.
Does it make sense to wave goodbye to policyholders who are in good health and still want and need coverage?
Insurers and agents should consider options, such as lowering premium spikes at the end of the level premium period in order to soften anti-selective lapses.
In addition, intensified efforts to remarket fresh coverage with some type of simplified underwriting years before the end of the level premium period (i.e., not waiting until the year before) could prove more profitable overall. This can be true despite the fact that some carriers today rely on profits earned in the year or two after the level premium period ends, when healthy lives haven’t yet gotten around to lapsing from the sticker shock.
What about return of premium term? Here is a product that attracted strong success, reaching 15% or more of term sales. The design is simple–buy term for a defined period, and if you don’t die, you get all of your money back. Now, though, due to a new actuarial guideline, the ROP term market has been either killed or wounded. Actuarial Guideline 45 was created ostensibly to enhance smoothness and equity. It requires higher interim cash values and maybe higher reserves. In my opinion, it has unnecessarily hindered a simple and useful design by making the product more expensive.
Term products deserve a dose of innovation. The products have been sold on a pure price basis for too long. This has driven prices down so low that even the general public is amazed at the bargains available.
Prices have recently risen modestly, but a preferred path is somewhat higher prices and more creativity, which the public and agents will embrace. For example, term life frameworks will accommodate joint lives (first- and second-to-die) and LTC combos.
Pairing term life with annuity riders makes more sense as the age 50+ customer base becomes prime term buyers.
Insurers and agents only get so many opportunities to meet customer needs. Term life should be managed and designed more creatively to retain customers and provide expanded value in these challenging times.
Timothy C. Pfeifer, FSA, MAAA, is president of Pfeiffer Advisory, LLC, Libertyville, Ill. His email address is [email protected]