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INSURANCE EXPERT WITNESS - Areas of Expertise

Permanent Life Insurance
In order to cover someone for their whole life, it was necessary for the industry to protect themselves from the onslaught of claims that would undoubtedly occur as a book of business began to age. They knew, as do we all, that as someone ages, their chances of dying increases to the inevitability of death.

The only way they could protect themselves and offer a product that would meet the demands of the public was to average the premiums over a lifetime. This resulted in the insured paying more in the early years and less in the later years than the actual death cost for a given year. The result of this was the establishment of a reserve in the contract so that the insurance company had an ever decreasing exposure to the ultimate payout by virtue of having a reserve of cash in each policy, the “cash value”.

As the reserve in the policy grew over the years, the net amount at risk decreased by the same amount. For example, if a policy for $100,000 had a reserve of $50,000 when the insured died, the insurance company only had to come up with $50,000 in pure death benefit. Legislative pressure and enactment of laws requiring carriers to make a portion of the reserve available to the owner should he decide to no longer keep the coverage in force resulted in access to a portion of the reserve upon surrender of the policy. These new laws resulted in what are known as non-forfeiture provisions.

These reserves would receive a guaranteed interest rate guaranteed by the carrier. Sometimes the rates were very competitive while at other times the guaranteed rate was lower than competing products. However, it was an iron clad guarantee with all investment risk assumed by the carrier alone, a basic tenet of the life insurance business until very recent years. Proponents and critics of these types of contracts have based a good deal of their opinions on the very facts the interest was guaranteed and the rate that was being paid.

Thus began a run of more than 70 years in the life insurance industry of competition between carriers regarding their permanent portfolio of products. As carriers began marketing their permanent portfolio they introduced a variety of products based upon the simple concept of covering insureds for their whole life. Policies were designed to pay up at a specific time, such as age 65 or a specific number of years such as 20 and 30 pay life plans. At the desired time the insured could have a “paid up” policy, meaning that the carrier had collected a sufficient amount of premium to have the reserve equal to what would be required to deliver the specified death benefit regardless of when death occurred. These hybrid “whole life” or permanent plans of insurance filled every rate book in the industry for many years and served the industry and the public well for decades.

Simple to administer, highly profitable to the carrier and well accepted by the public, all was well until the convergence of the dual threat to the industry of record high interest rates and the computing power made available with the advent of the silicon computer chip which transformed the life insurance industry as it did so many others.