PERSPECTIVE
There's a glaring oddity about the current term insurance marketplace and the way renewable term is being sold to the public. It has to do with those life companies and agents that are preoccupied with the idea of re-entry options and premiums. And this intense interest in re-entry term insurance isn't without consequences; it leaves the door open for legal exposure from unhappy consumers, some of whom will be unable to qualify for re-entry in the future.

The core problem with re-entry is the tendency for companies to illustrate premiums as though they were somehow a renewal option. That's the primary source of confusion for the client, and it is where such illustrations will come back to haunt the life companies and agents that use them to sell term.

To understand the situation, there needs to be clarification on the terms "renewal" and "renewal premium." Take a 10-year term policy and a 10-year renewable term policy, for example. With the renewable policy, the client has the right to continue to purchase the policy after the initial 10 years. By contrast, the nonrenewable policy doesn't give the client that right. Does this mean that the client is stuck, unable to buy term life insurance? Of course it doesn't. If the client is insurable (that is, still in good health) he or she can apply for another term insurance policy and continue to have term insurance protection.

The word renewal here means the contractual right to continue to buy term insurance without underwriting consideration. Renewal premiums, therefore, are those paid after the initial 10 years and don't require the client to submit any medical underwriting evidence. It simply can't be argued that re-entry values are renewal premiums simply because re-entry is based upon insurability and insurability is the fundamental element guaranteed by renewability.

Nevertheless, there are life companies that illustrate future renewal premiums by showing three columns side by side. One column shows the current renewal premiums; another shows the guaranteed renewal premiums; and the third shows re-entry premiums. The mistake, which is easy to make and will haunt the industry later, is the notion that re-entry values are renewal premiums, or that the premiums are somehow equivalent to or comparable with current and guaranteed renewals.

Re-entry premiums are not renewal premiums; they are "start-again" premiums. No matter how much fine print or how many caveats are added to the bottom of a term illustration, courts will decide in favor of unhappy litigants who found they couldn't qualify for re-entry premiums. These clients will argue that they didn't understand the significance of not passing a physical and will demand compensation for their losses. The fact that re-entry values are parked side by side with renewal premiums will make it very hard to explain to a judge and jury how there could be no confusion. When in doubt, courts tend to favor consumers over manufacturers; salespeople rarely fare well in such cases.

What's even more interesting is when re-entry illustrations are portrayed as a policy feature that offers some kind of value to the client. Re-entry only gives a client what is already the client's right. The client doesn't need a company's permission or contract provision to apply for a new term insurance contract. Providing the client is insurable, which is the basis of re-entry, he or she can choose from any number of life companies that would be happy to sell a new term insurance policy. It can even be argued that a company which is competitive for a person at one age may not be as good a choice at a different age. The client's best strategy may be to buy a new policy from a different insurer.

In defending re-entry term insurance, its proponents may argue that the average person doesn't appreciate that he or she can buy a new term insurance policy to replace their old one. While that argument is somewhat hard to swallow, the concept of starting a new policy certainly can be conveyed without creating the illusion that it is a contract provision. In fact, pretending that it's a contract provision when it really isn't could be interpreted as an attempt to mislead consumers into thinking they are paying for something they already have without cost.

An irony of the focus on re-entry is that many agents like to sell whole life insurance. When comparing term vs. whole, it seems strange to be giving a term insurance policy an unfair advantage over the permanent plan. Using re-entry values in comparison with whole life fails to highlight an advantage that the latter provides: Future physicals aren't needed. Therefore, why would anyone want to compare the future costs of permanent with the future illustrated costs of a term policy based upon its re-entry values? In fairness to customers and the whole life policy, agents should be using and comparing current or guaranteed renewal premiums for term insurance, not re-entry values.

As long as agents are happy to emphasize re-entry values to their clients, life insurers will have little motivation to sharpen their pencils when calculating future, current and guaranteed renewals. If no one pays attention to such values anyway (and many don't) there's no reason to worry about how good or bad they are.

Insurers have made an extraordinary effort to position initial term premiums as competitively as possible, even lowering them significantly. By sharp contrast, many companies handle future renewals as though they were an afterthought. If more agents focused on those values as the true future values, it would pressure companies to pay more attention to how attractive those renewals are. Companies would respond by making those premiums more competitive than they are now.

10-YEAR VS. 20-YEAR
Such a refocus by agents bears out in actual experience. There is comparison software that doesn't use re-entry values when looking at term insurance policies. As a result, many agents using the software have had to change their approach, but many with positive results. When comparing a 10-year term to a 20-year term, where the 20-year term plan guarantees premiums for 20 years, these agents now find that consumers tend to purchase the longer guarantees even though the initial premiums are significantly higher. The future renewals of many 10-year plans make a 20-year guaranteed plan look very attractive at older ages. Given the choice, consumers tend to pay more to obtain longer guarantees. By contrast, to look at the 10-year plan, with its 10th year re-entry value, side by side with 20-year term, the 20-year policy would not appear that much better.

At the other end of the spectrum, there are agent-generated illustrations of term insurance where the only values illustrated are re-entry values. Many agents make a small note on the bottom of the illustration referring to guaranteed premiums that can be found in the policy should the client want to see them. Such illustrations are blatantly defective and will eventually cause problems for everyone, not just those who use the defective illustrations.

The National Association of Insurance Commissioners and several state legislators currently are debating the need to regulate life insurance illustrations. While the vast majority of illustration problems are related to the those of cash value, whole-life products, the current focus on re-entry leaves the door open for politicians to argue that there are also problems with term illustrations.

It's time for life insurers and agents to re-examine their views and practices with regard to term insurance illustrations, namely, the concept and illustration of re-entry. And as radical as this may seem, re-entry should be dropped like the proverbial hot spud. If life companies can come together and agree to stop making reference to re-entry within their policies and sales materials, it would immediately resolve this problem. Unfortunately, as long as even one company engages in the illustration of re-entry values, others feel compelled to respond in kind.

Leaving this problem unresolved is an open invitation for future government intervention. It's always a shame to leave a door open for government regulation of something the industry can and should fix itself.

Bob Barney is president of Compulife Software Inc., Amherst, N.Y., which surveys the term rates of more than 175 life insurance companies.