Problem of Re-entry
By Bob Barney, President of COMPULIFE and TERM4SALE
 

As the owner of a company manufacturing independent term comparison software I have found one glaring oddity about the current term insurance marketplace and the way that renewable term insurance is being sold to the public. The oddity has to do with those life companies and agents who are pre-occupied with the idea of "re-entry" options and "re-entry" premiums. Not only do I find this pre-occupation odd, I think it leaves the door wide open for future legal exposure from unhappy consumers, some of whom will be unable to qualify for re-entry in the future.

I know that I am not alone in my views on this matter. One life insurance company has promoted its term products under the advertising headline "There's a virus infecting your client base, and guess who's spreading it. You ... if you've been selling re-entry term."

Not only do I think this is superb advertising, it's a warning we should all take seriously. The ad goes on to explain, "Like a long-dormant virus, re-entry term insurance strikes just when a client is most vulnerable. And with re-entry term, it only takes a little health problem to see a big increase in rates."

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

To understand the problem we first need to define what the terms "renewal" and "renewal premium" mean. If we contrast a 10 year term policy with a 10 year "renewable" term policy and then ask what the difference is, we would have to conclude that renewable means that the client has the right to continue to purchase the policy after the initial 10 years. By contrast, the non- renewable policy does not give the client the right to continue the policy. Does this mean that the client is stuck, unable to buy term life insurance? Of course it doesn't. We know that if the client is insurable (still in good health) that they can apply for another term insurance policy and continue to have term insurance protection.

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We must conclude that the word renewal means the contractual right to continue to buy term insurance without underwriting (medical) consideration. When we say that a 10 year term policy is renewable we mean that the client has the ability to continue to buy it once the 10 years are up. Renewal premiums are those premiums which the client will pay after the initial 10 years; the premiums which do not require the client to submit any medical underwriting evidence. By comparison there is no way that it can be argued that re-entry values are renewal premiums simply because re-entry is based upon insurability and insurability is the fundamental thing guaranteed by renewability.

Having established that, I have noted life company after life company who illustrate future renewal premiums by showing three columns side by side. One column of premiums will show the current renewal premiums, another will show the guaranteed renewal premiums and the third will show re-entry premiums. The mistake, and one that is easy to make, and the one that will haunt everyone later, is the notion that the re-entry values are a renewal premium or that the premiums are in some manner equivalent to or comparable to current and guaranteed renewals.

To summarize, re-entry premiums are not renewal premiums, they are "start again" premiums. No matter how many caveats or fine print is added to the bottom of a term illustration, it is my view that courts will decide in favour of unhappy litigants who found they couldn't qualify for re-entry premiums, who will argue that they didn't understand the significance of not passing a medical and who 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. It should also be remembered that when in doubt courts tend to favour consumer's over manufacturers; sales people rarely fair well in such cases.

What's even more interesting about the use of re-entry illustrations is the notion that it is a policy feature that represents some kind of a value to the client. It seems to me that re-entry only gives a client what is already the client's right. The client does not need a company's permission or contract provision in order to apply for a new term insurance contract. Providing the client is insurable (healthy), which is the basis of re-entry, the client can choose from any number of life companies who would be happy to sell them a new term insurance policy. In fact it can be argued that a company which is competitive 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 and buy it from a different insurer.

The only rationalization I have ever been given, for even mentioning the concept of re-entry, is the argument that the average person does not appreciate that they can buy a new term insurance policy to replace their old one. While that argument is a stretch of my imagination, the concept of starting a new policy can certainly be conveyed without creating the illusion that it is a contract provision. In fact, pretending that it is a contract provision, when it really isn't, could be interpreted as an attempt to mislead the consumer 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 permanent life insurance. When comparing term versus permanent it seems very strange to be giving a term insurance policy an unfair advantage over the permanent plan. Using re-entry values in a comparison with whole life fails to highlight an advantage that whole life provides: that future medicals are not needed. Therefore, why would anyone want to compare the future costs of permanent to the future illustrated costs of a term policy based upon its re-entry values. To be fair to your customer, and to the whole life policy, you should be using and comparing current or guaranteed renewal premiums for term insurance and not re-entry values.

Another important and often overlooked aspect to using re-entry values is the fact that as long as agents are happy to emphasize re-entry values to their clients, then life insurance companies 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, then why worry about how good or bad they are.

From my own analysis of many life insurance company rate cards and manuals it is clear that an extraordinary effort has been made to make initial term premiums as competitive as possible. By sharp contrast, many companies handle future renewals as though they were an afterthought. Further, as competition has heated up in the term market I have witnessed many companies taking steps to signficantly lower their term premiums without ever making a change to the long term renewals used. If more agents were to focus on those values as the true future values, it would place pressure on companies to pay more attention to how attractive those renewal were. Companies would respond by making those premiums more competitive than they are now.

Such a re-focus by agents bears out in actual experience. My own term comparison software does not use re-entry values when making comparisons of 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 very attractive at older ages. Given the choice, consumers tend to pay more to obtain longer guarantees and I think they're making the right choice.

By contrast, if you were comparing the 10 year plan, with its 10th year re-entry value, side by side with 20 year term, then the 20 year policy would not appear that much better. Of course we need to keep in mind that the average agent just hates it when a consumer decides to buy a policy which has a significantly higher initial premium, particulary when it appears that the policy is more in the client's interest than a cheaper policy. (I trust you "get the joke" in that last statement.)

On the opposite end of the spectrum I have reviewed agent generated illustrations of term insurance where the ONLY values illustrated were the re-entry values. Many make a small note on the bottom of the illustration refering to guaranteed premiums that can be found in the policy should the client want to see them. I consider such illustrations to be blatantly defective and will eventuaally casue problems for everyone, not just those who use the defective illustrations.

As many already know, the NAIC and a number of state governments are currently debating the need to regulate life insurance illustrations. While the vast majority of illustration problems are related to the illustrations of cash value, whole life products, the current focus on re-entry leaves the door open for governments to argue that there are also problems with the way that term illustrations are made.

I think it's time for life insurance companies and agents to re-examine their views and practices with regards to term insurance illustration and the concept and illustration of re-entry. I suggest, as radical as this may seem, that re-entry be "dropped like a hot potato". If life companies can come together and agree to stop making reference to re-entry within their policies and sales material, it would immediately resolve this problem.

Unfortunately, as long as even one company engages in the illustration of re-entry values, then others will feel compelled to respond in kind. On the flip side, 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 we could and should fix ourselves.

Re-entry has the real potential for becoming a serious long term problem for everyone, "like a virus hidden in your client files".