How Far Guarantees Should Go

For many years I have been working the numbers side of life insurance products, always in an effort to provide clients with the best pricing and the best product alternatives. The rule with me has always been to make the product offering straightforward, clean and in the consumers’ best interests.

After the crazy 1980s and 1990s, when many producers were showing absurd projections and “quick money” pictures, products changed to emphasize long guarantees of premium, death benefits and even cash accumulation. Starting in the early 2000s, there was a time of consumer-driven products that removed the worry of fiduciary negligence from the producer—the client knew what and when to pay and, in return, had guaranteed death benefits for their entire lives. Aggressively priced term products created liquidity for temporary needs and for those with high needs who did not have the funds to purchase products for their entire lives. It is important to work with brokers to help term purchasers convert their term products to longer guarantee alternatives and continue to show whole life products with guaranteed death benefits—either in the form of participating whole life or guaranteed universal life.

There are now carriers who have and are currently repricing term and UL insurance, increasing prices and shortening guarantees. Current regulations have increased reserve financing costs to the carriers considerably and that, combined with the low interest rate environment, has made long guarantee products more expensive. It is more than reasonable to accept that carriers must have profitable business and must comply with current regulations. Our current economic environment is what it is—and we must adapt.

However, the question that really needs to be asked is, “How long is a lifetime?” If you paid for flood insurance on your home for twenty years, lost your coverage for whatever reason (too expensive, lack of a carrier or forgot to pay the premium), and the following year your home was wiped out by a storm, how would you feel? Would you not add up your twenty years of premiums paid for “nothing” and feel robbed? Similarly, how do you think the family of a 103-year-old will feel when they learn the million dollar policy the parent paid for, year after year until age 100, was no longer in force because the policy death benefit guarantee ended at age 100?

Here are the facts: By 2020 the number of people turning 100 could increase as much as sevenfold. By 2050 the Census Bureau’s high estimate is more than 15 times the low estimate (AP story: April 27, 2011). Based on the Valuation Basic Table from the Society of Actuaries, a healthy 65-year-old woman and a healthy 55-year-old man have over a 20% chance of living to 100. That same 55-year-old man has a 9% chance of making it to 105 and a 3% chance to 110 (a female who is 65 years old has a 9% chance to make it to 105). What is the ultimate pattern of mortality? You, and what you tell your clients, determine the guarantee length that they buy. Why are so many of you so sure that your clients won’t live past 100? That opinion is not necessarily correct!

This is the kicker: Do you know how small a difference there is in premiums that provide guarantees to age 120 versus 100? It might be as little as 3 to 4%! I took one of our leading A+ carriers and ran a male age 55, preferred best nonsmoker, at a one million dollar death benefit. The difference in annual premium between a guaranteed death benefit to 121 compared to  age 100 was $430 dollars a year. Is the difference in cost worth the risk?

Many carriers are pushing “current assumption” products with guarantees to age 100 or even just through current mortality. Are you (or is anyone) really able to predict current and future earnings that will be needed to ensure the product will hold up for a person’s entire life? I personally favor being sure a death benefit will be there when it is needed. As long as we have long guarantee products from companies who are able to reserve for them and still be profitable, why in the world would you not offer them to your clients?