The price of term life insurance, which has been falling as life expectancies improve and insurers aggres- sively pursue that market, could be headed for a turnaround of sorts when the year 2000 rolls around.
The reason? A new regulation, to become effective Jan. 1 in many states, will require insurers to strengthen the financial underpinnings of policies they sell. The result, at least for some companies, will be higher premiums, regulators and industry officials say.
Insurers are not having problems paying claims, said Iowa Insurance Commissioner Terri Vaughan. But some were structuring policies in such a way that regulators became concerned that they might have difficulty in the future.
Life insurance "is a very long-term business," Vaughan said, and the new rule "was intended to prevent long-term problems."
But little is certain about the rule, widely known as Triple-X because it was the 30th in a series of proposed regulations. Some states will not adopt it right away, and some perhaps not at all, and even in states that do implement it, not all carriers will be affected by it.
Still, it is being used as a marketing device by some insurers and agents, and potential customers across the country are being bombarded with "buy now before the price goes up" sales pitches. Thus, consumers should understand what the issues are and what the background is.
The background is this:
The rule was drawn up by the National Association of Insurance Commissioners, an organization of state insurance regulators. The NAIC drafts model rules and statutes, but insurance is regulated by the states, so it is up to the states to adopt them. After several years of controversy, the model was approved last year and the NAIC has been urging states to implement it by Jan. 1.
Most, but not all, are planning to. The American Council of Life Insurance expects about half the states to act by Jan. 1 and an additional eight to 10 shortly thereafter. Virginia officials said the rule will go into force there Jan. 1. The District is aiming for the same time but isn't certain it will be ready. Maryland regulators have decided to adopt the rule but haven't picked a date.
The rule stems from regulators' concern that some companies are underpricing term insurance, or pricing it in a way that involves excessive risk. Term life insurance is pure insurance: It promises to pay a certain sum if the insured dies while the policy is in force. Nothing else. It is generally the cheapest form of life insurance and is typically used by families to provide cash if a wage earner dies.
In simplest terms, Iowa's Vaughan said, insurers are required to set aside enough reserves so that the combination of interest on them and future premiums is sufficient to cover claims. The higher the future premiums, the lower the required reserves, she said.
Some companies had reacted to this and the current competitive climate by structuring policies with premiums that are very low in the early years but scheduled to rise sharply later on. The increased premiums reduced the need for reserves.
In practice, though, policyholders tend to drop the coverage rather than pay the high premiums, so the book of business ends up under-reserved.
Under Triple-X, companies will be required to even out reserves and premiums over the scheduled life of the policy.
Existing policies will not be affected, but Triple-X may force some companies to boost premiums for new ones and possibly to stop issuing long-term policies, such as those that offer coverage for 20 years.
Companies that have been reserving properly, industry officials and regulators believe, will not be affected. But the removal of the competitive pressures brought by the low-priced policies may allow others to boost prices.
Thus consumers should be concerned about a possible price increase, but they should be more concerned about whether (a) they need life insurance and (b) if they do, whether they have enough. Those who need it should begin shopping now because it takes time to get a policy approved and issued, and, price considerations aside, you could die any time, so if you need coverage, you should try to get it in place as soon as you reasonably can.
So, do you need it?
Life insurance comes in two broad kinds: term and cash-value. In contrast to term's relative simplicity, cash-value life comes with an enormous number of whistles and bells and is typically used for more than income replacement. It is suitable for estate planning, some investment strategies and other sophisticated financial planning. It is not affected by Triple-X.
Term life is best suited for making sure that family members don't suffer financially if a key source of income dies. It can be used to make sure a spouse who does not hold a job spouse has adequate income to cover college costs and other such needs. It remains in force for a term of years and can be timed to expire when the need disappears--for example, when the last child finishes college.
The question to ask is: If I died, would someone be strapped by the loss of my income? If the answer is no, then you probably don't need life insurance. Singles and young working couples with no children, for example, can usually get by without it.
Families with young children, and especially families with one earner, should have life insurance (assuming they aren't independently wealthy, in which case they probably should be looking at some of the fancier policies for estate planning).
Many employers offer group term life insurance, and that is often reasonable and may not require a physical examination. If that coverage isn't enough, then it may be worthwhile to consult an agent about an individual policy.
And in today's wired world, it is becoming easier to shop for insurance via the Internet. Insweb Corp. (http://www.insweb.com), AccuQuote (http://www.accuquote. com) and other companies offer online rate quotations and, in some cases, online sales.
"Term life is the simplest insurance product to offer at a Web site today," said Greg Jones of Insweb. Looking things up online "really does give the consumer a good read."
Web sites also offer information about insurance, calculators for evaluating needs and other useful tools.