Updated: May 3, 2013 12:14PM
Originally published: August 7, 2001
Get ready for higher prices on term life insurance. Consumers have reaped a bonanza of sorts on the cost of term life policies in the last few years. But that’s about to change, because last week the regulators decided that the companies needed to keep more reserves behind their policies. Setting aside those reserves will cost the companies money - and result in higher premiums for many term policies issued in the future.
Byron Udell, founder and president of AccuQuote (800-442-9899), one of the largest life insurance quote services, says he expects prices of the most popular 20- and 30-year guaranteed plans to rise at least 50 percent starting Jan. 1, 2000. Udell says the National Association of Insurance Commisioners has been discussing this change, known in the industry as Regulation XXX, for the last few years. The commissioners have said they’re worried that insurance companies aren’t setting aside enough reserves to back the guaranteed prices on these policies. But Udell challenges that position.
``This is going to cost consumers millions of dollars in premiums - and quite unnecessarily,’’ says Udell. ``What the commissioners are saying is that insurance company actuaries are pricing policies below reasonable costs. That’s ridiculous. When insurance companies have gotten into trouble in the past, it hasn’t been because of pricing their products too low; it’s been because of bad investments like junk bonds.’’
But Tom Foley of the North Dakota Insurance Department, who headed the actuarial task force of the NAIC, says: ``A technical loophole in the law has allowed companies to hold basically zero reserves on these products, which is not only inappropriate but dangerous. Who knows what a 20- or 30-year future could bring in the way of expense changes or changes in the rate of death claims paid? What we’re trying to do is provide consumers with reasonable protections so that the insurance companies will be around to pay these claims in two or three decades.’’
Term life has always been the least costly way to insure - at least while the insured is younger. Prices of traditional term policies rise each year, as the mortality rates rise. But for a family that is seeking to insure the breadwinners at least until college is paid for or the mortgage is paid off, term policies have always been the most attractive. As the insured reaches age 50, the annual premium increases become prohibitive. So at that point, people switch to policies that build cash value.
Term life prices have been real bargains in recent years. But the most popular plans have been those that guaranteed a flat rate for 20 years, or even 30 years. The policies don’t build up any cash value like traditional whole life policies, but they do result in level premiums that allow consumers to budget for the future. In 1998, 82 percent of term policies sold by AccuQuote had rates guaranteed for 20 or 30 years.
It’s easy to understand the attraction. For a 40-year-old man, the price of a good $500,000 20-year level term life policy has dropped 56 percent in the last five years, from $1,005 to $450 a year. Those are real quotes from AccuQuote’s data base, comparing today’s prices with those of five years ago. And they reveal the bargain that term insurance has become as companies competed for the business.
But, those are also the kind of policies that have the insurance commissioners worried. They say that kind of price guarantee requires greater reserves. However, Udell says the commissioners are influenced by the big mutual insurance companies that are trying to sell more profitable whole life and universal life policies. Today’s low term prices make those other, more expensive policies less attractive to consumers. Foley calmly disputes that charge: ``All we’re trying to do is put a good solid foundation on term; we’re not trying to favor either one.’’
But there’s little doubt that the regulations will make premiums rise starting next year. Udell notes that the state of New York has always had its own requirement for higher reserves on policies sold there. In fact, today AccuQuote says a $500,000 20-year guaranteed, term life policy for a 35-year-old man would cost $500 per year in the state of New York, compared with only $310 per year in the rest of the country. Udell says those reserve requirements raise rates on policies sold to New York residents - resulting in consumers who are underinsured simply because they can’t afford the annual payments.
And Udell points to a loophole in Regulation XXX that he predicts will cost consumers even more money in the long run. Under the proposal, companies still could market 20-year projected level term policies that offer competitive low rates to start - but those 20 year rates simply won’t be guaranteed. And, he says, you can bet that about five years down the road, the premiums will take a huge jump. But the policies will look attractive at first because insurance salespeople will sell these non-guaranteed products by pointing to a recent history of keeping rates level.
In fact Udell charges that the NAIC is actually making insurers less responsible and accountable to consumers, because if they entice consumers with prices that are actuarily too low at the start, they’ll be free to raise prices down the road. Today’s guaranteed products, he says, obligate the insurance company to deliver a level rate for the entire 20-year term.
These new higher premiums required by Regulation XXX are not expected to go into effect until Jan. 1, 2000. Consumers who buy level term policies this year will lock in the guaranteed lower rates for the next 20 or 30 years. You can bet there will be a rush to beat the price increases. But should consumers who buy today be worried about insurance company safety? No more than those who will certainly pay higher prices next year. So the smart shopper will buy term insurance before year end - and make sure that the premiums are guaranteed to stay at today’s all-time low rates.
Terry Savage is a registered investment adviser for stocks and commodities and is on the board of directors of McDonald’s Corp. and Pennzoil Co. You can send her questions via e-mail at email@example.com. Her second book, published by HarperCollins, is Terry Savage’s New Money Strategies for the ‘90s. Copyright Terry Savage Productions.