Nonforfeiture

[Bama Gambler]

Ok, I'm confused. I'm always hearing the term nonforfeiture thrown around so I decided to look it up in my Life Insurance Products book. Here is the only definition they have:


nonforfeiture options - The various ways in which a policyowner may apply the net cash value of a life insurance policy if the policy lapses, such as automatic premium loan, cash surrender, extended term insurance, and reduced paid-up insurance.

Why would a policy lapse if it has a CSV? Does surrender = lapse (guess so since one of the options is cash surrender)? What's the deal with nonforfeiture laws? Please help the ignorant!

[JMO]

Before there was a Standard Nonforfeiture Law, policies were not required to have cash values. (They still aren't, in Canada.) The cash value is also sometimes called the non-forfeiture value. The other alternatives are just that, optional forms of non-forfeiture. In theory, I think a company could omit the cash option and only have, say, reduced paid up. State insurance departments are apt to be confused by this, and so are consumers, so most companies don't go that route.

Because of the flexibility in Universal Life, a separate non-forfeiture provision is rather redundant, but again, most companies include a section on the subject. For UL, cash value is generally the only thing offered - at least that's how it worked back in history when I was doing UL product development.

Hope that helps. :)

[Bama Gambler]

Hope that helps. :)That helped tremendously!! Thanks!!

[urysohn]

surrender = lapse? Depends who you talk to. Text books tend to treat them as the same thing. But a surrender is a voluntary lapse: policyholder calls in and asks that their policy be cancelled, for example. Alternatively, some people (usually the Systems folks, since their coding changes) view a surrender as a lapse when the policy has some cash value.

[Chuck]

I believe *lapse* generally refers to the nonpayment of a required premium. *Surrender* refers to surrendering the policy back to the company and requesting the cash value. You can lapse without surrendering, but you can't surrender without lapsing.

You also may hear the terms *lapse with value* or *lapse without value*.

Generally, the grace period provision applies upon lapse, but it does not apply upon surrender.

Chuck

[Bama Gambler]

thanks urysohn and chuck

[Actuary321]

In theory, I think a company could omit the cash option and only have, say, reduced paid up. State insurance departments are apt to be confused by this, and so are consumers, so most companies don't go that route.

Actually, I believe that the Standard nonforfeiture law requires cash values, reduced paid up and extended term options.

There was a group working on an update to the SNL (not Saturday Night Life) that would allow companies to provide nonforefeiture options that did not include all three options. And the values would be able to be somewhat dynamic. If the experience of the company was good the values could be raised and lowered if bad. Not sure where that proposal is currently.

[Double High C]

In theory, I think a company could omit the cash option and only have, say, reduced paid up. State insurance departments are apt to be confused by this, and so are consumers, so most companies don't go that route.

Actually, I believe that the Standard nonforfeiture law requires cash values, reduced paid up and extended term options.



I think that in certain cases - before year 3 only, in the case of traditional products - you don't have to offer CSV but must offer RPU.


There was a group working on an update to the SNL (not Saturday Night Life) that would allow companies to provide nonforefeiture options that did not include all three options. And the values would be able to be somewhat dynamic. If the experience of the company was good the values could be raised and lowered if bad. Not sure where that proposal is currently.

I am not sure that anyone knows, though I believe that it is safe to say that nothing will likely be happening anytime in the foreseeable future. (Does anyone know if it is officially dead?)

[JMO Fan]

The American Academy of Actuaries has a Nonforfeiture Improvement Work Group (NFIWG), formed under the Life Practice Council. NFIWG recommended to LHATF (the NAIC actuaries) that SNFL be overhauled. Although several LHATF members were skeptical (some of them are only interested in stricter regulation or rate control), NFIWG was given the task to come up with recommended changes. One idea might be to add some responsibility to the Illustration Actuary with regard to nonguaranteed elements, possibly in exchange for more flexibility on required cash values.

The timetable is not clear, and the NAIC climate is muddy. There are at least a few regulatory actuaries who recognize that the pre-UL law does not provide a clear standard for current products. The forward-thinking leadership of the Academy hopes to modernize the SNFL dinosaur for the 21 century -- hopefully they can get a majority of LHATF to agree.

[JMO]

I find it difficult to believe that much is going to happen. More than ten years ago, I participated as an industry observer in a task force on the same subject. And the same issues are still being debated.

Federal income tax treatment of inside buildup could be at risk if any substantial change is made, and few people now believe it would be a good thing if that happened. There is some indication, at least, that not everyone now agrees it would be a very bad thing. Until the climate changes on that issue, though, there will continue to be more talk than action.

[Chuck]

Although several LHATF members were skeptical (some of them are only interested in stricter regulation or rate control)

That, I think, hits the problem on the head. In my opinion, there is a major problem with the whole process which dooms it to failure and that's why revamping the SNFL has been going on for years and years with no progress.

What's the sense of the LHATF telling a group to go off and make proposals to solve a problem, when it is clear that the LHATF does not agree on what the problem is? Is the main problem that the old SNFL is not flexible enough to allow companies to offer innovative products and new choices? Or is the main problem that the SNFL needs to better control dangerous products and new choices? The result is that any simple, straightforward, understandable, and effective proposal will not be acceptable.

That's why previous attempts have resulted in massive amounts of white papers, reports, nebulous proposed requirements, etc, that attempt to implement "anything goes" while giving the appearance of some type of regulatory control or oversight.

To me, the basic underlying problem is that, on the one hand, you cannot legislate equitable values for an asset (ie insurance policy), and on the other, you cannot trust companies to provide equitable values for assets if it is profitable and possible for them to do otherwise.

The only way to ensure an equitable value for an asset, is to have a safe, efficient market for that asset and to require that assets be structured in a way that allows the market to value them. That should be the goal of any proposal.

Chuck