“Triple X” Guidelines Unsettle Term Life Insurance Market New Reserve Requirements Could Change Product Lines

Term limits are not just a political issue.

The insurance industry and its state overseers are pondering the adoption of regulations that would change the way many term life insurance policies are priced.

And pending that change, some companies are discounting their policies to grab as much of the market as they can.

For consumers, who are buying more term policies than ever, the intermission may be creating more short-term uncertainty, but long-term security their beneficiaries will collect on the policies.

Term insurance is the simplest life insurance product. A set amount of insurance is purchased for a premium. If you die during that period, your beneficiaries collect. If not, the policy has no cash value at the end - unlike whole-life policies that increase in value like an investment.

Because you can get more insurance for your dollar, term policies have increased their share of the life insurance market to 27 percent in 1995 from 19 percent in 1988.

Depending on the policy, premiums may increase as the buyer ages, or they may be fixed for as long as 20 years.

It is the fixed-rate policies that are generating all the talk.

In 1994, the nation’s state insurance regulators adopted proposed new guidelines called Regulation XXX, or “Triple X.”

The proposed regulations would set new reserve requirements for companies selling term life policies.

Some companies, said Spokane agent Bob Bishopp, had no reserves. Conservative companies like Northwestern Mutual Life, which he represents, either set aside reserves or did not offer fixed-rate policies.

If they did create reserves, Bishopp said, companies had to charge higher premiums, hampering their competitiveness.

With Triple X, he said, all companies could sell term policies with no reserve for five years. After that, premiums would be adjusted within a floor and ceiling set forth in the policies.

In the case of a 45-year-old male who does not smoke, for example, a $250,000 policy from Northwestern would cost $669 for five years. That would be the floor in subsequent years, with the ceiling set at steep multiples to reflect increasing mortality.

But Bishopp noted Northwestern has historically never charged more than the rate established when the policy was sold.

He added that the industry as a whole pays death benefits on less than 2 percent of the term policies sold, vs. 30 percent on wholelife policies.

Washington State Life Underwriters President David Knecht, also a Spokane agent, said some of the impetus for Triple X was the recollection of the problems caused by the failure of a few larger insurers in the late 1980s and early 1990s.

But states have been slow to adopt Triple X despite endorsement of the regulations by the National Association of Insurance Commissioners.

Jim Alcorn, director of the Idaho Department of Insurance, said Triple X is a low priority.

Triple X might unnecessarily inflate insurance costs, he said.

Washington Insurance Commissioner Deborah Senn is unconvinced the regulations will solve the reserve problem, according to spokesman Jim Stevenson.

For one thing, he said, monitoring the reserves of every company selling term life insurance would require complex, expensive computer software.

Senn is also wary of the sales pitches some insurers are making based on representations that higher reserve requirements will mean higher premiums, Stevenson said.

One such salesman is Robert Davis, vice president of a Phoenix-based Insurance Quote Services, which for a fee helps customers find the cheapest insurance.

Calling Triple X misguided, he nevertheless said the guidelines have created an artificially low market for term insurance.

“We have seen premiums come down to the lowest level in history,” Davis said. “Consumers are the winners.”

Premiums vary considerably, depending on how long a period a buyer wants to lock in costs.

A price sheet prepared by Davis for a $100,000 policy shows annual premiums for a 45-year-old, non-smoking male starting at $257 for five years, ranging up to an average $518 for a 20-year plan.

By comparison, a 20-year plan with rates increasing yearly starts at $200 for the first year but finishes at $1,227, averaging $648 over the life of the policy if the holder does not die in the interim.

John Rathbun, executive vice president of the Washington State Life Underwriters, agreed that term rates have gone down - by as much as 20 percent - but said the threat of Triple X had nothing to do with the rollbacks.

“I don’t see any companies responding to that possibility,” he said.

Rathbun said insurers have trimmed rates by segmenting the market, then targeting products to appeal to each niche.

“It’s a market-driven issue,” agreed Knecht.

, DataTimes