Standard Nonforfeiture Law - Exceptions

[life_interrupted]

In the Standard Nonforfeiture Law, Section 9 states...

"This Act shall not apply to any of the following: ..... A term policy of uniform amount, which provides no guaranteed nonforfeiture or endowment benefits, or renewal thereof, of twenty (20) years or less expiring before age seventy-one (71), for which uniform premiums are payable during the entire term of the policy;..."

Given a 20-year guaranteed renewable term product with the following characteristics:

1. The insured has the option to renew for additional 20 year term periods without evidence of insurability.

2. The benefit amount remains unchanged.

3. Although premiums increase each time the term period is renewed, they are level throughout each term period.

4. Premiums for all future renewal terms are known at issue and are not subject to change.

5. Under this design the final term period may be shorter than 20 years because the plan expires at attained age 80.

Do you think a plan of this type would fall under this section of the nonforfeiture law, and therefore, is not required to provide cash values for any 20 year term period that expires before age 71?

My interpretation is that it does. The only sticky part of the language that might be subject to another interpretation is where it refers to a level premium over the entire period of the "policy". From my perspective, the premiums are level over the initial term period and then the term period starts over each time and continues to have a corresponding level premium. As long as a term period ends before age 71, I don't think you have to offer any cash value. Now, if someone reaches attained age 71 prior to the end of the term period (whether initial or renewal) or if the plan was similar but for a 30yr period, then that period would be subject to the nonforfeiture standard.

I'm curious if anyone else would argue differently and if so, why?

I've never had to think about the details of this exception until now.

[JMO]

"5. Under this design the final term period may be shorter than 20 years because the plan expires at attained age 80. "
These final periods will need to have cash values, because they don't meet the exception requirements. And having created a plan that needs cash values, what benefit exactly do you see in not providing cash values for the whole life of the plan? They would be pretty small, anyway. That's why the exception was allowed, to reduce administration of plans that only had tiny little CVs for a few years.

If you changed attained age 80 to attained age 70, you wouldn't have to provide CV, at least that's how my former companies have interpreted the exception.

Of course, nobody does the "renew for another 20 years" design any more anyway.

[Jwallace]

I think that the policy will need cash values for the entire coverage period. The policy lasts longer than 20 years and provide coverage beyond age 71, so it fails on both counts.

By this I mean that you need to demonstrate that the contractual cash values are at least as high as SNFL's requirement, which will take the guaranteed premium structure into account. That may even result in zero cash values, but it's through the application of the SNFL minimum, not the SNFL exception.

[Steve Grondin]

Check for state variations. There might be some states that extend the 71 to 81.

[Chuck]

The exemption does not apply anywhere because it either renews beyond 20 years or beyond age 71.

But it still may not require cash values. It must be tested for required cash values under the deminimus test (cash values less than $25 per 1000). If you have the right pattern of renewal premiums (ie increasing steeply enough), you may not generate cash values of $25 or more.

Sorry - did not read JWallace - ninja'd.

[life_interrupted]

Thank you for the input so far.

JMO: For some reason, marketing wants the policyholder to have the option to keep the coverage up to attained age 80, otherwise, it would be clear cut. It's not a question of whether the customer would benefit from providing cash values, it's just that so little truly develops, offering cash values clutters things more than anything else. More admin, more expense, etc...


To Jwallace & Chuck: It probably won't sway your interpretation but I should have clarified that the premiums are guaranteed and therefore the current and guaranteed scale are the same.

Working through the calculation, there are some cases where the plan would produce cash values above the 25$ per 1,000 (although not by much) and therefore would have to provide for cash values in any duration where one resulted, regardless of size. In this case, the pattern of cash values would look strange on a schedule page if all future renewals are displayed since the values climb and then return to zero within each term period, as opposed to the steady climb you usually see with true permanent insurance.

Because I have seen the "exclusion" approach taken by other very experienced actuaries in the past, I'm still not fully convinced that the term periods expiring prior to age 70 wouldn't be excluded from the calculation. It seems to me that the language "...term policy of uniform amount,...,or renewal thereof,...." might account for n-yr renewable term insurance, similar to the plan described here.

I can see a supporting argument being that since it's an option to renew and only those who continue to renew at older attained ages or those who purchase the plan at an older issue age to start with, will end up with coverage that exceeds age 70. If the option to renew is not excercised, then the plan does expire prior to age 71. In essence, they are treating each renewal term period as stand alone coverage that may get renewed once the 20 year term period expires.

I posed this question to one of the state insurance departments. I received a response from one of their general counsel that indicated he believed it to be exempt. I did not give him my opinion prior to receiving his answer. However, I would like to get the opinion of more actuaries, not attorneys, since it is an actuarial question more than a legal one.

Anyone else want to chime in?

[jraven]

Your interpretation completely trivializes the 20-year portion of the exemption - under your approach ANY level benefit term product that terminates before age 71 can ignore cash values. You just have to call it (solely within the context of SNFL calculations) 1-year renewable term.

I mean, I don't see anything in your reasoning that requires the premiums to change each "renewal" (or ever).

[Chuck]

A term policy of uniform amount, which provides no guaranteed nonforfeiture or endowment benefits, or renewal thereof, of twenty (20) years or less...

It is the bolded part that defeats your argument I think. It says nothing about level premiums or premiums that increase every 20 years. As JRaven points out, you'd only have to increase your premium by a penny every 20 years if your argument holds. Lawyers won't understand the question - you'd need to ask the DOI actuaries. Not to say that you couldn't get this to slip by and get approved somewhere, but the history is pretty clear in general.

Suggestions

Try extending the renewability to age 95 or higher with very high steeply increasing ART rates between ages 81 and 95. and use those in your unitary cash value calculation.

Are your 20 year term periods "attained age" rates, or can you vary the rates by issue age? If you can, then experiment with the pattern during the level period also. Steeper rates means lower cash values.

Playing around may get all those CSVs below $25.

Chuck

[JMO]

btw, if you have CVs that come and go, you might also need to check for compliance with the "smoothness" requirement.

[life_interrupted]

I find all the comments posted here to be helpful. I appreciate the input.

Since there is flexibility to change the rates by issue age, it looks like the best thing to recommend would be simply changing the rates at the older ages so that anyone either buying or renewing at those older ages would have slightly higher rates. This would avoid the question altogether and remove those cash values that appear here and there. I played with the rates and that should not be difficult.

And yes, the smoothness testing is something we have already identified as a consideration.

Again, thanks for the feedback.