Pros and cons with life policy structures

In a continuation from his earlier article Jon-Paul Hale discusses the different policy structures and where the fishhooks lie.

Saturday, January 2nd 2021, 2:06PM

Jon-Paul Hale

So you know your policy wordings right?

Hmm ... I wonder? I talked the last time about passback and hardening and retracting markets for life insurance. Also, the impact of cover structures with policy documents.

These are clear issues with how we give advice and will come into the picture more in the future with the scrutiny from both regulators, and more so compliance auditors. I expect we are going to have a lot of education to do with the compliance people on how we do things. As many have an outside-looking-in background, which usually doesn’t understand the nuances particularly well.

When we focus on policy construction and how the policy wordings work, there are a few things that are both an advantage and a disadvantage with the Cigna and Partners Life policy structures.

The first is the advantage that new covers get the existing policy wording if that benefit is already on the policy.

Also, it gives us access to cover increases that are not presently on the market. One example is mortgage repayment insurance. As the redundancy coverage is linked to the mortgage amount with Partners Life, if there is redundancy cover on the policy and you do a mortgage special event increase on the mortgage repayment cover, you get an increase in the redundancy cover too. (Yes, I have checked this with at least three people at Partners Life, and I think more were involved in the discussion in the background I didn’t talk to.)

I have clients overseas presently, increasing cover is a problem. They have the FIO option on their cover, as they were clear they had a desire to increase their cover in the future. We’ve been ticking up their cover by about $50k per annum on the back of this.

Then you have the outright special events (SE) increases. Now for the majority of insurers, this is straightforward, have an SE, and you increase the cover on the terms of the existing cover you are increasing.

This is where the fishhooks of policy document construction become clear. In the Partners Life and Cigna policies, it doesn’t necessarily happen this way.

With Partners Life, the SE increase works on the basis of the last terms that were underwritten and accepted by the client. So if they have been underwritten and had a 50% loading on a second life benefit, then that loading applies to the SE increase done on the original standard terms benefit too.

With Cigna, it is a little worse. The SE increase is based on the last underwriting for the client. Accepted terms or not.

So with Partners Life you can submit underwriting, get terms, not accept them, exercise a special events increase and then go from there with underwriting and terms, if there is a need for increased cover. Or go elsewhere for the rest of the increase and protect the SE options in the future on the Partners Life cover.

With Cigna, you need to be smarter than the average bear. Yes, I do mean this. A recent statement from a US park ranger about not having bear-proof trash bins got the answer: “They aren’t [bear-proof] as there is significant cross over with the intelligence of bears and humans.” ;)

With Cigna, you need to be sure that the client continues to be standard terms, or the same terms as the original underwriting, before proceeding to underwriting. You could snooker the client’s ability to increase cover under a special event in the future.

Now, I don’t know what Cigna would do with a special event if the last underwriting was a deferral. Readers out there may have had this experience and can comment?

I would hope that the deferral would be set aside for the SE and be allowed on the prior terms underwritten that did offer cover. That may be wishful thinking ...

Hopefully, you get my point. The structure of policy wordings from the various providers have their pros and cons.

Multiple policies that give you clear, absolute benefit management, but are messy for the client with multiple policy documents and payments.

Versus the single policy approach that has the advantage of large sum bundling across benefits, single policy and payments, and wordings for increase cover, against limitations on event increases and confusing policy schedules with numerous benefits of the same types of cover.

I have one policy, the one I mentioned above, where we have five different life benefits per person and are about to add a sixth ...

Where does this all leave us?

Policy administration, and replacement, have been in contention for a long time. With the added scrutiny of the regulator and compliance managers on this, with increasing public awareness of the pitfalls, we need to be vigilant that we are doing the right thing for the client at a much deeper level than we have been.

Did you get the memo a couple of years ago? While you are doing your level five for the new rules, you also have to do your product accreditation and keep it up to date.

Hopefully you were working on your personal development planning while you sunned yourself on the beach over the Christmas break. Because I’m not seeing a lot of time to do this between now and March 15.

Tags: CPD Jon-Paul Hale Life insurance Opinion