Term Insurance, Beyond the Pricing

February 7, 2019

 

On November 2, 2018, VOYA Financial announced that effective December 31, 2018 they will effectively exit the life insurance business by no longer offering the sale of new policies.  As has been the case historically, VOYA made note that they will continue to honor the obligations for existing policy holders; while that means that death claims will be paid and premiums on inforce business collected, it does raise a question as to what options will be available for owners of term insurance when it comes to conversion.

 

Term insurance is the most basic form of risk transference in the life insurance marketplace. These policies provide pure insurance protection that pays a predetermined sum (death benefit) if the insured dies while the policy is active.  All premiums paid are used to cover the cost of insurance protection.  The “term” is the number of years the insurance carrier guarantees the premiums to remain level, most often 10, 15 or 20 years; after the expiration of the term period, the policy is renewable going forward, but the premiums are likely to increase dramatically. 

 

Because of the simplicity and the cost-effectiveness of the coverage, term insurance is the most often sold coverage and is a major planning component for consumers from the very beginning stages of protection to high net worth individuals:  in 2017, 2,366,679 term policies were sold for a total premium of $2,314,113,0001.

 

When it comes to demonstrating the profitability (for the insurer) or ineffectiveness (to the consumer) of term insurance, the most commonly quoted industry statistic is that ‘less than 1% of all term policies result in a death claim’.  This analysis is incomplete, as several complicating factors, including the number of term policies that are replaced by lower cost term and/or the number of term policies that are converted to permanent insurance that results in a death benefit, may not be factored into the equation or represented in the data set correctly.  That being said, based on experience, it is rational to assume the majority, if not the vast majority, of term policies will come and go without a claim being paid. 

 

With guaranteed level premiums and the absence of equity build up, it is easy to make the assumption that all the products are same, and, as such, the purchasing decision should be based on the price per unit of coverage.  The ability to convert term insurance to permanent coverage without the need for medical qualification is an extremely important, though often overlooked, component of selecting a term insurance provider. 

 

Because of the cash flow advantages of term insurance, term is often the foundation of a life insurance portfolio, purchased by clients as the first line of protection against a premature death.  Term insurance may be used in lieu of permanent coverage because of budgeting restrictions, uncertainty of the future of estate tax, business succession planning, or as a gateway to a more permanent solution in the future.

 

An unfavorable change in health – in which the insured cannot qualify for the same rates, or is denied coverage – is the most often catalyst for triggering a term conversion.    Conversion may be the only option for once-healthy clients that experience an adverse health experience to continue coverage beyond the initial term period.  Unexpected health changes may affect people of all ages, even the young, healthy population; I recently had the experience representing a close family member in converting coverage for a client who survived breast cancer at 30 years old.  By activating the “call option” on her Preferred rates from only two years prior, we were able to implement a permanent insurance product at attractive rates that the insured could not achieve for many years, if ever.

 

Many clients and advisors remember when MetLife – once of the largest and most dominate names in the industry – made the decision to exit the individual life insurance business in early 2016.  As part of the restructuring, MetLife seeded a new company, Brighthouse Financial, to administer the enormous block of inforce business.  As part of the division of contracts, MetLife retained a portion of term policies, which are convertible to a single whole life contract, which, under the various scenarios our firm has looked at, does not price competitively versus underwritten products in the marketplace.  For advisors, the carrier doesn’t offer any sales support for conversion illustrations or application submission.  Term policies recharacterized as Brighthouse are convertible to the PAUL product, which is generally used in the marketplace as an accumulation rather than death benefit focused product.  One could come to the conclusion that MetLife/Brighthouse is honoring the contractual guarantee to make conversion available, but has designed the product and service model to limit the sales to only those insureds with no other options.

 

Brighthouse isn’t alone in the availability of conversion options.  Legal & General America, a combination of Banner Life and William Penn Life Insurance Company of New York, offer a single Universal Life policy for term conversions and new purchase.  When operating separately, Banner was consistently a competitive carrier from a pricing standpoint, which, after mergers and acquisitions, has resulted in a limited portfolio – a choice of one.

 

A current trend in term conversions is to bifurcate the available options after a certain period of time, e.g., a full product portfolio is available for first 7-8 years of a 10-year term contract, but conversion in the “out” years – when a conversion is most often elected – is limited to specific permanent designs.  Other carriers, most notably TransAmerica, will limit the both the amount of insurance convertible ($1,000,000 face amount maximum) and the products available by year.  Several providers, such as Principal, will offer an extension rider that will push out the ability convert through the entire duration of the level term period rather than for only for a portion of the period, e.g., 7 of the 10-year level period.  Based on underwriting class, this rider has a 7-10% increase in price.  For a 43-tyear old male in the Preferred Non-Tobacco risk class, this takes the annual premium for $2,000,000 of 10-year level term from $1,120.03 to $1,219.32.

 

The language of the permanent product to which you can covert is something to be considered.  For example, Nationwide contractually only has to offer Whole Life, but currently offers Whole Life, Variable Universal Life, Universal Life and Indexed Universal Life.  As of the writing of this article, the only highly rated carrier that contractually guarantees the ability to convert to the entire product portfolio (those available at the time of conversion) in Penn Mutual.

 

In conclusion, the process of obtaining term insurance should be an analysis beyond the pricing.  Especially in situations when term insurance is a bridge to future long-term permanent planning, consideration should be given to the value of having insurance on your future insurability.  For clients with inforce term policies the coverage shouldn’t be treated as a “set it and forget it”.  Whether the original issuing provider has made changes to its position on conversions or not, recent developments in the marketplace, including the favorable pricing impact of the 2017 CSO table and advantageous changes to substandard risks, make it necessary for a term review to be conducted on a regular basis to confirm that the term insurance in place fits the clients needs now and into the future.

 

 

1 LIMRA data, 2018

 

2354951RM-Jan21

 

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