Don't Forfeit Nonforfeiture.
Opinion: Eliminating laws that require surrender values surrender value
See cash surrender value. for permanent life policies threatens to bruise bruise
Visible bluish or purplish mark beneath the surface of unbroken skin, indicating burst blood vessels in deeper tissue layers. Bruises are usually caused by a blow or pressure, but they may occur spontaneously in elderly persons. the life industry--both financially and in the eyes of its customers.
The standard nonforfeiture law, a pillar pillar, freestanding columnar supporting member. It is a general term, little used as an exact architectural definition except as applied to an upright support in the medieval styles, consisting of an assemblage of juxtaposed shafts and moldings; unlike the column, of life insurance practice since the 19th century, remains a foundation of consumer protection. With some modification, it can serve the best interests of the life insurance industry for years to come.
The need for a standard nonforfeiture law was first identified in the mid-1800s by Elizur Wright Elizur Wright (12 February 1804 - 22 November1885) was an American mathematician and abolitionist. He is sometimes described as the "father of life insurance" for his pioneering work on actuarial tables. , an actuary actuary
One who calculates insurance risks and premiums. Actuaries compute the probability of the occurrence of such events as birth, marriage, illness, accidents, and death. who was insurance commissioner of Massachusetts. On a trip to England, Wright saw speculators amassing fortunes by buying life insurance policies from the elderly and weak. These policies were bought from people whose savings had been spent and who could no longer pay their premiums. Upon his return to the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. , Wright championed reform by requiring surrender values that would benefit and protect policyholders.
Now, as then, fair nonforfeiture values continue to align the interests of the insured and the insurer. The insured wants good value for premiums paid. The insurer provides good value so policyholders will keep their policies in force, because the company will experience a gain for every year that the insured does not terminate the contract. The longer the contract stays in force, the better everybody does. The core premise of the current standard nonforfeiture law is as true today as it was in 1941 when the Guertin Committee of the National Association of Insurance Commissioners The National Association of Insurance Commissioners (NAIC) is an Internal Revenue Code Section 501(c)(3) non-profit organization which seeks to organize the regulatory and supervisory efforts of the various state insurance commissioners from around the United States. explored nonforfeiture values and concluded that a policyholder's investment in a long-term life insurance contract should be protected.
An NAIC NAIC
See National Association of Investors Corporation (NAIC). task force will continue discussion of nonforfeiture law at its national meeting this month as some industry actuaries propose to eliminate nonforfeiture requirements. These industry actuaries argue that companies should have total freedom in product design, even if that means discarding such benefits entirely. Among other things, this would clear the way for companies to sell "cash valueless" products--life insurance products that would never build cash values, regardless of the level or number of premiums paid.
The major consumer beef about permanent life insurance involves early surrenders. Since the mid-1990s, the Consumer Federation of America The Consumer Federation of America (CFA) is a non-profit organization founded in 1968 to advance the consumer interest through research, education and advocacy.
According to CFA's website, its members are approximately 300 consumer-oriented non-profits, which themselves have and others have decried the "billions of dollars" that consumers waste on cash-value life insurance cash-value life insurance
A type of life insurance in which part of the premium is used to provide death benefits and the remainder is available to earn interest. Thus, cash-value life insurance is both a protection plan and a savings plan. when they terminate early. The consumerists' point is that someone who surrenders a cash-value policy in the early years receives a cash value (or nonforfeiture benefit) far less than premiums paid.
We could argue that low early cash values are a logical and necessary result of the structure of permanent life insurance. But we don't see how anyone could rationally expect consumers to embrace the idea of receiving no surrender value at all, at any point in time. Such a response to an apparent industry vulnerability is akin to pouring gasoline gasoline or petrol, light, volatile mixture of hydrocarbons for use in the internal-combustion engine and as an organic solvent, obtained primarily by fractional distillation and "cracking" of petroleum, but also obtained from natural gas, by on a fire.
The absence of nonforfeiture requirements has been a major contributing factor to the appearance in Canada of at least two versions of permanent policies without cash values. The proponents of eliminating nonforfeiture laws often point to the Canadian experience as proof that such policies can work. We believe the Canadian experience demonstrates precisely the opposite.
Of these two Canadian products, one is a "term to 100" plan, essentially a whole life policy with no cash values. The other is a universal life version, with annual mortality charges that remain level rather than increase. No nonforfeiture values are associated with these level charges.
What is the main attraction of these plans? It's simple: lower premiums, at least compared with plans offering the same death benefit guarantees with "regular" cash values. These policies, however, have an Achilles' heel. In order to work at such low premium levels, the policies depend on lapse-supported pricing, a pricing method facilitated by the absence of nonforfeiture requirements. This pricing method is unfair to consumers. And for insurers, it could lead to financial loss and/or unexpected increases in reserves.
The main problem with lapse-supported pricing is that it depends on forfeiture The involuntary relinquishment of money or property without compensation as a consequence of a breach or nonperformance of some legal obligation or the commission of a crime. The loss of a corporate charter or franchise as a result of illegality, malfeasance, or Nonfeasance. . Simply put, companies count on policies to lapse (language) LAPSE - A single assignment language for the Manchester dataflow machine.
["A Single Assignment Language for Data Flow Computing", J.R.W. Glauert, M.Sc Diss, Victoria U Manchester, 1978]. in order to support those that don't. Without nonforfeiture requirements, a company does not have to pay a surrender value that bears a reasonable relationship to the assets it has accumulated for each policy.
Therefore, each time a policy lapses, the company's gain is much larger than would reasonably be expected. The company takes these gains to provide benefits for policyholders who don't allow their policies to lapse and who hold their policies until death. These gains are the basis of lower premiums in lapse-supported policies.
In other words Adv. 1. in other words - otherwise stated; "in other words, we are broke"
put differently , companies price such policies with the expectation that there will be a lot of "losers." If the company's original assumption for lapse rates lapse rate
The rate of decrease of atmospheric temperature with increase in altitude.
The rate of change of any meteorological phenomenon, especially atmospheric temperature with altitude. materializes, it only must pay a few persisters, or "winners." The vast majority of policyholders who lapse their policies before death are the "losers." They receive much less at surrender than what any reasonable person would perceive as acceptable value.
When such products were introduced in Canada, the ultimate annual lapse rates used for pricing were 6% to 7%. A steady 7% lapse rate would result in about 75% of all policies lapsing lapse
v. lapsed, laps·ing, laps·es
a. To fall from a previous level or standard, as of accomplishment, quality, or conduct: with no value during the first 20 years. In other words, the companies assumed that at least 75%--and probably a much larger percentage--of policyholders would get less than "fair" value at termination. At that lapse rate, insurers could afford to pay on the remaining 25% of policies that would persist until death.
But actual experience did not turn out as expected. While the Canadian Institute of Actuaries The Canadian Institute of Actuaries is the national organization of the actuarial profession in Canada. It was incorporated on March 18, 1965. The FCIA designation stands for Fellow of the Canadian Institute of Actuaries. reported that lapses in early years did range from 7% to 10%, actual ultimate lapse rates were much lower than anticipated. They dropped to 3.5% by the sixth year, and fell gradually to about 2% in years nine through 14.
What happens when lapses are lower than expected? To begin with, even a steady lapse rate of 2% would result in fully one-third of all policies lapsing with no value during the first 20 years, and almost 65% of policies lapsing with no value over 50 years (which, for many life insurance buyers, is a reasonable estimate of the number of years remaining in their lives). So even when lapse rates are lower than expected, a significant number of policies deliver no value. This does not seem like a path to consumer satisfaction.
Second, and perhaps of more concern, lapse-supported pricing could create financial problems for insurance companies. For policies already issued, companies must either encourage lapses or increase reserves. One Canadian company noted that a decrease in lapse rates on a 5-year-old policy--from 3% to 2%--would require it to increase reserves by 15% to 40%. How many companies could do this without creating financial strain?
Even so, lapse-supported pricing for permanent life insurance is now crossing over into the United States. Some permanent policies are being sold with grossly inadequate cash values. In these cases, companies typically circumvent cir·cum·vent
tr.v. cir·cum·vent·ed, cir·cum·vent·ing, cir·cum·vents
1. To surround (an enemy, for example); enclose or entrap.
2. To go around; bypass: circumvented the city. the standard nonforfeiture law by adding so-called "no-lapse, secondary guarantees" to universal life products.
As in Canada, the primary attraction of these U. S. products is low premiums, which may look great at point of sale. But what will policyholders think about this 10, 20 or even more years down the road? Will they blithely accept nothing upon lapse or surrender? Will they recall the disclosure at point of sale, that this is a new kind of permanent policy with no cash values? The recent history of the life insurance industry suggests otherwise.
In fact, the not-so-recent history also suggests otherwise. Lapse-supported pricing already has been "field tested" in the United States, and it didn't work then, either. The tontines of 100 and more years ago were also built on lapse-supported pricing. These policies, introduced in the United States in the 1860s, provided nonforfeiture benefits only to survivors who lived to the end of a certain period of time. The consumer dissatisfaction they generated contributed to the 1905 Armstrong investigation, which led to stricter supervision of the insurance industry by New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of and other state insurance departments.
Rush to Viaticals
The current environment suggests that if an issuing company does not provide fair value, policyholders will proceed directly to a secondary market--presumably, a viatical vi·at·i·cal
1. or vi·at·ic Of or relating to traveling, a road, or a way.
2. Of or relating to a contractual arrangement in which a business buys life insurance policies from terminally ill patients for a percentage company--to get a better deal. There will be a secondary market for these contracts, and this will not be good for the life insurance industry.
Interestingly, this procession would lead to a final irony. Any mass rush to viatical companies would cause the lapse-supported pricing method to crumble crum·ble
v. crum·bled, crum·bling, crum·bles
To break into small fragments or particles.
1. To fall into small fragments or particles; disintegrate. altogether, because the policies just won't lapse. The viatical companies will see to that; they will continue to pay premiums to maintain the "no-lapse" guaranteed death benefit. This could result in financial problems for the issuing companies.
In short, lapse-supported pricing is not only unfair but in the long run, it's unworkable.
Revise, Don't Eliminate
The presence of nonforfeiture values is an excellent safeguard for both policyholders and companies, but the current standard nonforfeiture law should be modified.
One important modification would be to revise the law to make it clear that a fair value is required at termination for universal life, universal life with no-lapse guarantees and other nontraditional products. This revision would also help eliminate lapse-supported pricing.
Other revisions might include market-value adjustments and modified guaranteed cash values. Such revisions would permit longer-term investments, which would deliver much of the improved value that innovators innovators
people who will try new things.
important figures in the farming or client community because they are the leaders in the introduction of new techniques and management systems. attribute to "no cash value" policies.
However, one revision should not be considered: the elimination of cash values. The simple truth is that cash values for life insurance are accepted and even expected, because standard nonforfeiture law provisions have trumpeted them for years. Consumers expect cash options for life insurance contracts that require pre-funding. It would be impossible to create enough disclosure to ward off complaints at termination if neither cash options nor loan provisions were offered.
Finally, cash values are needed to strengthen the standard nonforfeiture law's ability to eliminate lapse support.
The issue of nonforfeiture values is more than just an academic exercise. Today, the prevalence of industry mergers and acquisitions is generating more and more "orphaned or·phan
a. A child whose parents are dead.
b. A child who has been deprived of parental care and has not been adopted.
2. A young animal without a mother.
3. " blocks of lapse-supported business. Policyholders can find themselves at the mercy of "new" owners, whose emotional attachment and commitment to them and their policies is tenuous tenuous Intensive care adjective Referring to a 'touch-and-go,' uncertain, or otherwise 'iffy' clinical situation at best. In the past, the realities of the marketplace might have prevented the new company from treating its inherited inherited
received by inheritance.
inherited achondroplastic dwarfism
see achondroplastic dwarfism.
inherited combined immunodeficiency
see combined immune deficiency syndrome (disease). policyholders less than fairly. But with lapse-supported pricing, the company has a clear financial incentive to treat policyholders unfairly and actively encourage them to lapse. This puts policyholders in "no-win" territory--either stick with a company that doesn't want them, or lapse a policy with little or no surrender value.
What should protect policyholders is a standard nonforfeiture law that requires fair nonforfeiture values and applies to all life insurance contracts. What should protect them is a standard nonforfeiture law that requires "fair value" to help align the interests of both insurer and insured. Such a law would empower insureds by giving them some financial leverage in their otherwise mismatched dealings with insurers.
Without such laws, policyholders who find themselves in this position will be as powerless as the penniless pen·ni·less
1. Entirely without money.
2. Very poor. See Synonyms at poor.
penni·less·ly adv. individuals who fell prey to speculators in 19th-century England.
With some minor revisions, the standard nonforfeiture law can be as important and vital today as when it was introduced more than a century ago. To keep a great industry great, we must ensure that this law is maintained and strengthened.
William C. Koenig, FSA FSA Financial Services Authority
FSA Food Standards Agency (UK)
FSA Farm Service Agency (USDA)
FSA Financial Services Agency (Japan) , MAAA MAAA Member of the American Academy of Actuaries
MAAA Mid-America Arts Alliance
MAAA Model Aeronautical Association of Australia
MAAA Montreal Amateur Athletic Association (Quebec)
MAAA Metropolitan Area Agency on Aging , is senior vice president and chief actuary and Stephen H. Frankel, FSA, MAAA, is vice president-actuary at Northwestern Mutual Life Insurance Co., Milwaukee.