Question on Whole Life Insurance COIs

[Airborne]

Hello to all you brainy folks out there !

This should be a simple question for those involved with Whole Life design.

I'm only a measley life insurance agent, but I'm getting conflicting info. on the COIs in Whole Life, and if you can believe it, I want to do right by my clients.

I was trained that EVERY type of permanent insurance has a term component and a side fund. Are the COIs fixed at the issue age age throughout the life of the policy, or do they rise per year as the insured gets older (annual renewable term) ? A

I already understand the decreasing term = increasing cash value concept, but I thought the term "fixed COIs" as it pertains to Whole Life was due to use of the Standard 1980 CSO and ULs use the 70% 1980 CSO, but ULs allow the insurer to raise COIs to the Standard 1980 CSO. Obviously this does not apply to the states which have mandated use of the 2001 CSO.

Help.

[FSA]

I was trained that EVERY type of permanent insurance has a term component and a side fund. Are the COIs fixed at the issue age age throughout the life of the policy, or do they rise per year as the insured gets older (annual renewable term) ?

I already understand the decreasing term = increasing cash value concept, but I thought the term "fixed COIs" as it pertains to Whole Life was due to use of the Standard 1980 CSO and ULs use the 70% 1980 CSO, but ULs allow the insurer to raise COIs to the Standard 1980 CSO. Obviously this does not apply to the states which have mandated use of the 2001 CSO.

Term + side fund is a simplification. A true side fund is outside the insurance policy.

Generally mortality increases with age. Thus the mortality charges within a whole life policy will increase with age, the same as an ART. I don't know where you get your 70% figure, current COI charges on UL vary significantly, up to the maximum.

No states have mandated 2001 CSO yet. 2001 CSO isn't required for use until 1/1/2009.

[Airborne]

FSA said

Term + side fund is a simplification. A true side fund is outside the insurance policy.

Generally mortality increases with age. Thus the mortality charges within a whole life policy will increase with age, the same as an ART. I don't know where you get your 70% figure, current COI charges on UL vary significantly, up to the maximum.


Could you please elaborate on #2, specifically when you say "generally". Are there times when it does not increase ?

When I first got into the insurance biz., I got trained by a guy who was initially in sales, but later went to the actuary side. He provided me a set of mortality tables (1958 and 1980 CSO). There is indeed a 70% 1980 CSO, which means the COIs are 30% less than the 1980 CSO Standard

You're probably right about COIs varying significantly on ULs, which is one of the factors I look at before I make a recommendation.

Have you worked for more than one insurer ?


Thanks

[FSA]

Could you please elaborate on #2, specifically when you say "generally". Are there times when it does not increase ?

Yes. For example, mortality at birth (in the US at least) is higher than mortality at age 1. Also, certain conditions that cause higher mortality, certain surgeries, for instance, have an increase to mortality that wears off over time. Also, I belive there's a blip in the mid 20's when the accidental death rate wears off faster than the death from other causes increases.

Have you worked for more than one insurer ?

Yes, three. Two life, one health. Most is at a life company.

I have never seen a 70% of the CSO mortality table. I have seen a table that is a blend of males and females that assumes that 70% of the lives are male and 30% are females, and there are other blends as well, the most common being 80/20. Having seen patterns of mortality there's little chance that I'd use the 80CSO as my expected mortality, especially if the business is underwritten. 80CSO was designed as a valuation table and as such has quite a bit of conservatism.

[Airborne]

I very much appreciate your input & hope you sincerely believe that I as only an agent am fascinated with the actuarial side of the house & how it exactly relates to what I do.

Part of my fascination with the actuarial side might be derived from the fact that actuarial science is an "esoteric" body of knowledge, but at least you know you have someone else from the sales side who actually gives a damn about how insurance contracts work, which starts on your side of the house.

[JMO Fan]

COIs in UL are guaranteed in the contract; current COIs are declared by the company. In other permanent insurance, they are integrated into the premium. Guaranteed COIs are 80CSO (or 2001CSO in new UL) because, starting in the mid-1980s, the IRS laws used those mortality tables to define life insurance.

For permanent life, most insurers use mortality tables that are not at all related to 1980 CSO (and usually much lower). The 1980 CSO Tables were created from composite company mortality, conservatively loaded for statutory reserves. Pricing actuaries use other mortality tables for premiums, usually a mix of recent industry mortality with company mortality experience.

[agent007]

Hi there,

Does the insurer guarrantee the mortality cost (the unit cost so to speak/price per thousands) of the ART in the contract. Or can they decide how much the ART cost will be each year based on current factors? Or do they just decrease the dividend scale to effectively control the cost?

Thanks.

Term + side fund is a simplification. A true side fund is outside the insurance policy.

Generally mortality increases with age. Thus the mortality charges within a whole life policy will increase with age, the same as an ART. I don't know where you get your 70% figure, current COI charges on UL vary significantly, up to the maximum.

No states have mandated 2001 CSO yet. 2001 CSO isn't required for use until 1/1/2009.

[JMO Fan]

Hi there,

Does the insurer guarrantee the mortality cost (the unit cost so to speak/price per thousands) of the ART in the contract. Or can they decide how much the ART cost will be each year based on current factors? Or do they just decrease the dividend scale to effectively control the cost?

Thanks.

WL is virtually never priced with 2001CSO, which is heavily loaded for reserves, and wasn't created for premiums (despite the -misguided- IRS adoption of it in defining premiums for life insurance). COIs embedded in the contract are usually based upon a conservative version of the company's own mortality experience, which is generally below the 2001CSO. The WL "COIs" (which are usually only known to the company's actuaries) are more conservative for par policies (i.e., dividend-paying policies) because the dividends can refund any excess mortality charges.

[agent007]

So can an insurer effectively manipulate the amount of paid up additions your policy can purchase at some point in the future by adjusting the cost to purchase the PUA?

Let's say $1 of dividend declared buys you $4 of PUA in a given year. Then next year, could they manipulate it so that $1 can only buy you $3 the following year?