No matter how large or small your business, insurance can play an important role in your future planning. For the security of your family and your firm, it’s important to adequately insure yourself.
If you are thinking about buying term insurance, now is the time. If you wait until after the first of the year, rates are likely to go up.
New state legislation threatens to increase the cost and/or remove the long-term guarantees currently available. This legislation, known as Triple X, mandates that life insurance companies increase the amount of money they must keep on reserve in order to pay future claims.
Currently, you can purchase a term life insurance policy with those guarantees for up to 30 years. But the NAIC recognized that some insurance companies were pricing their products too low by using a loophole in the Standard Valuation Law, which ensures that companies maintain enough financial reserves to pay death claims both now and in the future.
The concern driving the new regulations is that some insurers do not hold enough cash in their reserves to pay claims on current policies if the company’s life insurance sales should begin to decline.
The change has been under consideration by the National Association of Insurance Commissioners for the past 10 years. “XXX” was the original designation given to the change when it first emerged as a possible piece of model legislation.
Companies can’t lose
This legislation is a win-win for the insurance companies.
By adhering to Triple X, the companies will be able to continue marketing their long-term products but will not necessarily have to guarantee them. Consumers will have a choice to pay a higher premium and get a guarantee or pay the same premium they do today and hope the insurance company doesn’t eventually increase rates.
Either way, the insurance company wins.
If consumers pay the higher premium, and the insurance company doesn’t need the extra money, the profit goes to the company. On the other hand, if the consumer decides to continue paying the lower premium without the guarantee, and the insurer needs the extra premium, the consumer will end up paying for it anyway since the policy isn’t guaranteed. The only loser in this game is the consumer.
Eight states have currently adopted this regulation. California is not one of them, but if an insurance carrier is domiciled in a state where Triple X has been approved, all of the states in which the carrier transacts business are forced to adhere to the new guidelines. Triple X is scheduled to become effective in California on Jan. 1 as well as in 22 other states.
Triple X will undoubtedly increase the likelihood that insurance companies will be able to live up to their commitments, which are important to the long-term interests of the consumer. Along with the likelihood of higher premiums and lower guaranteed periods, Triple X will most likely result in new products that look like permanent life insurance with minimum premiums.
Consumer dissatisfaction
The fa & #231;ade, however, will be that the long-term guaranty periods of these new products will disappear and be replaced with either universal life or graded premium whole life.
In the past, when insurance companies changed the interest rates on universal life products, class-action lawsuits resulted. This was due to consumer misconception as to what was being sold. I envision the same results over time.
In a recent letter to the editor in USA Today, George M. Reider Jr., NAIC president, encouraged readers to purchase term life insurance now because prices could increase once Triple X is implemented.
As an example, let’s look at a term policy purchased five years ago. The policy is a 10-year guaranteed level premium term. After carefully reviewing the policy, the owner determined that he or she would be better off to drop their current coverage and replace it with a 30-year guaranteed level premium term policy.
This change will lock in guarantees over the next 30 years, and the owner will not have to renew his or her insurance in five years when the current policy comes up for renewal.
The price difference between the current policy and the new 30-year term policy represents an increase in premiums of 15 percent. However, that’s only for five years. Once the 10-year guaranteed period ended on the original policy, the premiums would have jumped more than 100 percent. Not only did the owner reduce the overall long-term costs, he or she also guaranteed insurance at a very low price for an additional 25 years.
Triple X legislation will not affect policies already in force as of Jan. 1, 2000. It will not impact whole life policies, either.
Because it’s targeted at the long-term, guaranteed products offered today, what can consumers do to protect themselves against the potential 10 to 40 percent increases expected in the year 2000?
– Review your existing term policies to determine whether they should be replaced with a longer guaranteed period.
– Take advantage of the competitive guaranteed level prices available today.
– Lock in long-term guarantees, maybe as long as 30 years.
– Purchase any additional insurance you may feel necessary on a long-term guaranteed level basis.
If you are considering the purchase or replacement of term life insurance, this is the year to lock in low-priced, long-term guarantees.
Barry Boscoe is a financial planner affiliated with Brighton Advisory Group in Encino. He can be reached at [email protected].
Entrepreneur’s Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1759 with feedback and topic suggestions.
