Changing Your Insurance

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Changing Your Insurance

During the 1980s, there was a term price war and, every year companies offered lower priced products. Agents would sell company &J policy one year. The next year they'd come back to the same client offering Company B's policy at better rates.

Agents encouraged this churning because they received a new first year commission every time they sold a new policy.

Since these first year commissions were higher than the renewal servicing commissions, many agents simply replaced their own policies every two or three years.

As price competition increased, consumers quickly realized that by replacing the old policy with a new cheaper one every two or three years, they could get a free medical examination and a new cheaper policy. However, some not-so bright consumers ended up trading larger benefits for smaller ones or-even worse-paid-up cash value policies for term policies.

In the wake of all this, the insurance companies needed to do several things:

• keep the policyholder paying premiums for a longer period (5 to 10 years)
• keep tbe agents from replacing the policies every two years with cheaper products
• offer low attractive prices

Clever actuaries found a solution in the arcane laws governing the amounts of money insurance companies have to reserve per $1,000 of insurance. The solution was to offer level term insurance for 5, 10, 15, or 20 years. At the end of the level period, the premium would increase like traditional annual renewable term.

This solved all of the problems:

• the customer was incentivized to keep the policy for the full level period
• the agent couldn't easily persuade the customer to change pblicies
• the insurance company found a way to lock in the consumer for a 5, 10, or 15 year period

Still, replacement remains a perilous process.

The Replacement Game

Technically, replacement means any transaction in which new life insurance or a new annuity is purchased. It is known-or should be known-to the agent or insurance company (if there is no agent) that, as part of the transaction, the existing life insurance or annuity will be:

• lapsed, forfeited, surrendered, or terminated
• converted to reduced paid-up insurance continued as extended term insurance, or reduced in value by the use of non forfeiture benefits or other policy values
• amended to produce a reduction in the benefits or in the term for which coverage would otherwise remain in force, or for which benefits would be paid
• reissued with reduction in cash value

Frequently, it is not in the best interest of the policy owner to replace existing life insurance with a new policy. The reasons for this are many:

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• new insurance requires the applicant to prove insurability
• premiums may be higher for a new policy new policy provisions will have to be compiled with a new incontestable period -
• the existing policy's provisions may be more liberal than a new policy's provisions
• generally, a new policy will not have any current cash values Generally, if replacement is involved in any insurance sale or transaction, the agent or broker is required to:

• list all existing life insurance policies to be replaced
• give the applicant a completed Comparison Statement, signed by the agent or broker, and a Notice to Applicants Regarding Replacement of Life Insurance (a copy of the forms should be left with the applicant)
• give the insurer a copy of any proposals made, and a copy of the Comparison Statement with the name of insurer that is to be replaced At the same time, the duties of the replacing insurance company include:

• making sure that all replacement actions are in compliance with state regulations
• notifying each insurer whose insurance is being replaced and upon request, furnishing a copy of any proposal and Comparison Statement
• maintaining copies of proposals, receipts, and Comparison Statements The National Association of Insurance Commissioners (NAIC) has adopted a Model Life Insurance Replacement Regulation. The majority of states have replacement regulations based on this model.

You should check your state's regulations to learn specific time limits, such as:

• the time within which an agent must supply the applicant with a Comparison Statement
• the time and manner within which the agent must notify the insurer of replacement activities .
• the time within which the ,insurer must notify the insurer being replaced that such action is in operation
• the time within which the insurer being replaced must respond to the replacing insurer and the applicant Also, individual state law specifically outlines the method in which records are to be maintained and the length of time the records are to be made available
• A common wording for laws on record keeping is: These records shall be maintained for at least three years or until the next examination of the company by the Insurance Department.

A Case Study of Replacement Problems

Probably the single biggest danger posed by life insurance involves replacement policies that aggressive agents wrongly sell as cheaper, more cost-effective or broader alternatives ~o whatever coverage you're presently carrying. Many of the worst sales abuses never go public-but some more technical cases do shed light replacement problems.

The 1992 Kansas appeals court case Linda Jean Sonderegger v. United Investors Life Insurance Co. stands out as a good example. In January 1975, United Investors issued a modified premium whole life insurance policy to Linda Sonderegger as owner and beneficiary. Donald Sonderegger, Linda's husband, was the insured under the policy; which had a face amount of $ 50,000. '

The policy limited United Investors' liability for Donald's death from suicide through the following language: If the Insured shall commit suicide while sane or insane within two years from the Policy Date, the liability of the Company shall be limited to the amount of premiums actually paid hereunder.

The policy also contained a conversion provision which granted Linda Sonderegger the right to convert the policy on its tenth anniversary into other insurance defined under several-Options. The options stated that the new policy would be issued without evidence of insurability if the new policy had the same face amount or less as the original policy. The conversion provision also contained t1l.e following language:

If the policy is converted...the suicide clause shall be void in the new policy resulting from such conversion, and the new policy will be incontestable from its date of issue.

In a letter dated November 9, 1984, United Investors notified Sonderegger of the approaching tenth anniversary of the policy and advised her that, pursuant to the policy; she could continue the coverage as an ordinary life plan or convert it to a decreasing term insurance plan.

The company further explained that because its new life insurance plans offered greater value for the money, "we are extending to you the option to' purchase any policy now offered by our Company up to the amount of your Modified Premium Whole Life Policy without evidence of insurability."

On December 6, 1984, Sonderegger and her husband Donald completed a MPWL Conversion Application. The new policy they sought was called Vitalife ART. It had a face amount of $100,000. The application contained the following statement above the signature lines:

I acknowledge that the coverage provided by [the previous policy] will permanently terminate when the policy applied for above goes into effect.

An annual renewable term life insurance policy was issued in January 1985. The face amount of the policy was $100,000. The insured was Donald and the owner beneficiary was Linda Sonderegger. The policy also contained a suicide exclusion.

In July 1986, Donald Sonderegger died from a self-inflicted gunshot wound. In response to her demand for payment of the full $100,000 under the new policy, United Investors notified Linda Sonderegger that it considered only $50,0'00 of the coverage to be converted. and not subject to the suicide exclusion clause.

United Investors said that the remaining $50,000 was new coverage. Therefore, it wasn't liable for that amount-because the suicide had occurred within two years of the issue date. Sonderegger filed suit for the second $ 50,000.

The trial court entered a summary judgment in favor of United Investors. It found the conversion options contained in the original policy did not allow a conversion to a policy with a greater face value-to do so was, effectively, to replace one policy with another.

Sonderegger appealed. The appeals court opened its review by establishing ground rules for considering disputes over replacement life insurance:

The general' rule is that where an insurance policy is issued under a conversion option, whether a new; distinct, and independent contract results will depend upon the extent to which the terms of the substituted policy differ from the terms of the policy containing the option.

Sonderegger argued that a suicide exclusion in a converted life insurance policy had to run from the original policy's date of issue, regardless of any change in the amount of death benefits. United Investors simply repeated its argument from the trial court-that the second $50,000 was new; replacement coverage. The appeals court considering the case found United Investors's argument compelling. It found the newer policy a replacement-and concluded that the insurance company did not have to pay the second $50,000.

Cancellation Terms

Employer sponsored group insurance can usually be canceled at the insurance company's discretion. This isn't usually so for individual policies, group insurance or association

Be careful about trading an individual policy that can't be unilaterally canceled for a group policy that4can be.

Termination of Benefits at a Specified Age

There are numerous policies in which benefits are only available for a 10 year period, 20 year period, or to age 70. Make sure you're not trading a long-term policy for one that has more time restrictions.

Cheap premiums may mean hidden restrictions. Many companies offer 10 or 20 year term policies with limited conversion rights.

Guaranteed Renewability This is another standard term you will often see. It means that the policy is guaranteed to give the option of continuing insurance at some point in the future. It may be renewable fur 10 years, to age 70, to age 100 or for life. The renewing of the policy assures you that the policy cannot be canceled by the company until that future date arrives.

Reinstating Lapsed Policies

There are many benefits to reinstating and paying back premiums, instead of applying for a new policy:

• the lapsed policy; because it was written at an earlier date, may have more liberal contract provisions than a current policy .
• the interest rates on the policy loans may have been offered at a lower rate ~
• a policy issued at a younger age most likely has a lower premium schedule than one written at your current age
• if the policy date is more than two years old, suicide and incontestable clauses may no longer apply

Conclusion

When your insurance policy no longer meets your needs, it is important to replace a policy that would be. disadvantageous to you.

This chapter discussed the roles of the insurance company, agent and policy owner in replacement of a policy and how it is important that you are not persuaded into -buying a new policy that is not in your best interest.