You probably tend to avoid movies rated XXX, but this is a XXX story you won't want to miss if you're thinking about buying term life insurance anytime soon. XXX is the name of a pending insurance industry regulation that, if passed, is expected to take effect on Jan. 1 and will significantly raise the cost of term life insurance for consumers.
Term life insurance, like all life insurance, provides a lump sum payment at death. Term insurance, unlike cash value insurance, is pure insurance without a companion savings account. In contrast, cash value life insurance does include a savings component in addition to a death benefit, which makes it much more expensive.There are two types of term life insurance, level premium term and annual renewable term. Level premium term secures your premiums at a flat rate for five, 10, 15 or 20 years, depending upon the policy you choose. Annual renewable term (ART), also known as yearly renewable term, cost is only fixed for one year and gets more expensive as you get older, rising in price each year.
Many insurance buyers prefer the cost certainty of level premium term. Despite the fact that it is initially more expensive than ART, "98 percent of the term insurance business I do is level premium term," states insurance expert David Phillips of David T. Phillips & Co. ART premiums, however, get very expensive in five to 15 years, depending upon your age.
WHAT IS XXX?
The popularity and low cost of level premium term is threatened by pending XXX regulation. Like banks, all insurance companies are required to set aside reserves to cover future liabilities. Currently the reserve requirements for ART and level premium term are the same. XXX proposes to raise the reserve requirements and "deficiency guarantees" for all level premium term policies longer than five years.
The money set aside for reserve requirements for insurance companies, like banks, are less productive assets because they can use them only to invest in very low risk investments such as T-bills. By requiring insurance companies to increase their reserves, XXX will reduce insurance companies' ability to invest in higher growth vehicles like real estate and stocks, therefore reducing their profits. Guess who is going to make up the difference? You, the insurance consumer.
HIGHER RISK REQUIRES HIGHER RESERVES
The purpose of XXX is to require life insurance companies reserves to be reflective of the level of risk it takes. Level premium term is riskier for the life insurance company, not the consumer, because of long-term premium guarantees. The longer the premium guarantee, the greater the risk is for the insurance company.
Imagine if your health insurance premiums stayed the same for 20 years, regardless of how much health-care costs rose. Any health insurance company that offered that deal 10 years ago would be out of business today. Offering long-term, level premiums is very risky for insurance companies.
XXX recognizes this extra risk on level premium term policies, therefore seeks to appropriately raise reserve requirements on these policies. Unfortunately, the result of XXX will be to increase the cost of level premium term or eliminate long-term rate guarantees. "Longer term guarantees will become too costly for insurers," warns Gai Yellen of Houston-based Veritas Life.
WHAT SHOULD YOU DO?
First of all, XXX is pending, not the law of the land. Nobody knows for sure if and when XXX will pass. Those of you who already own level premium term policies will be unaffected if XXX passes. Those of you considering or in need of term life insurance may want to quickly evaluate your situation before Jan. 1, 1995.
This doesn't mean that you should rush out and buy insurance just because the price may go up. As with any product, inexpensive is only valuable if you need it. Evaluate your circumstances, review your current coverage, or lack of it, and then decide whether you need level premium insurance or not.
XXX, if passed, will cost term insurance buyers more money than if they were to buy today. If you need insurance, take action, but don't let a commissioned salesperson talk you into a product you don't need on the basis of a pending rate increase.
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ADDITIONAL INFORMATION
Example of level term rates pre-XXX
First Colony Life
healthy, non-smoking male
Age 5 year 10 year 15 year 20 year
25 $235 $235 $272 $308
35 $255 $255 $308 $383
45 $442 $485 $573 $760
Source: Veritas Life, 800-552-3553