When Genworth Life and Annuity released their Colony Term/UL a few months ago it became obvious that something was up, or down. With insurance companies raising the prices on term insurance for the last year and a half, this new product overcame some obstacle that allowed Genworth to lower prices and rocket to the top of the price leader board.
With several other companies poised to follow suit I think it’s important for agents and clients to understand what part of this new product is allowing them to lower rates. This comes at a time when reserve requirements mandated by state insurance commissions had them all moving their prices the other direction.
At first glance it appeared that the catch might be the fact that while term is convertible, a universal life product generally requires a large catchup (cash infusion) to carry the policy beyond the guaranteed level premium period. Once I received a full illustration it became apparent that there was no real advantage there because on the illustration I ran, the Term/UL level premium ran for 15 years and then the price jumped up in the 16th year to a rate comparable to a competitive universal life with a guarantee to age 105. Unlike term, whose guaranteed rates starting in year 16 go up annually, the Term/UL jumped up and remained level to age 105. No downside there.
What we were looking for was some component that would lead to a larger number of premature lapses. As that number goes up, reserve requirements go down simply by the fact that there will absolutely be less claims to potentially pay. Less claims = lower reserves = lower prices!
The next area we looked at was a fairly common occurrence, especially in tough economic times, the need to decrease the size or face amount of the policy. While we would all like to keep our life insurance at the level we want, budget almost always wins the war. So, we get calls asking to cut the size of a policy down and most companies are very gracious about that and it’s a painless process.
But here’s the catch. With the new term/ul products it appears that companies will have a surrender charge and if you decide to decrease the size of your policy, the surrender charge could kick in and make it economically impossible. In many cases this will throw people into a situation where, since they can’t afford what they have, lapse is the only option and then go elsewhere for a smaller term policy. A real hassle. And if there’s been a health change, maybe they will be in a position of no longer being able to afford life insurance.
I don’t like it. It seems like kind of a sleazy move to drive down reserve requirements, but let’s see how we can make it work. The only problem we could find with the new product is the issue of downsizing. So, if there is really no chance that you will need to decrease your policy, no harm, no foul. If you believe there is that possibility, consider taking out two or more policies to achieve your total needed. So if you want $1,000,000, why not consider two $500,000 policies or one $500,000 and two $250,000. Then if you need to downsize, you simply cancel a policy which doesn’t incur a surrender charge. You get all the advantages of the new product and take the one disadvantage out of play.
Bottom line. It appears several top term players will be making this change. What isn’t clear yet is if they will change completely or offer a choice of term or term/ul. Whichever way they go it is incumbent upon the agent to make sure clients do the right thing so they have flexibility down the road.