Premium Calculation

  • When it offers a plan of insurance for a specified premium it does so on the basis of an expected level of mortality, interest, withdrawal, expense and taxation in the future.
    • It also recognizes that the future experience levels will vary from those expected at issue through statistical variability or through long term or cyclical trends and sets its premiums to make allowances  for this variability.
    • As the experience under the plan unfolds the company can release into earnings the differences between the provisions in the premiums for variability and actual variations experienced to date.
    • The instrument for accomplishing this is the reserve and, specifically, the release from risk reserve system is based on this concept.

1974 – SOA – Report of the Historian – Special Report, Society of Actuaries – 116p

  • One thing to keep in mind is that you can take a traditional whole life policy and determine an underlying benefit generating function, because the cash values are simply there.
    • You can fix one item and say, “We are charging 1980 CSO mortality and 6% interest,” and then solve for the effective nonforfeiture net premium.

—  Douglas DOLL

1989 – SOA – Status Report on Standard Nonforfeiture Law Revisions, Society of Actuaries – 14p

1976 – SOA – Toward Adjustable Individual Life Products, Society of Actuaries, by Walter L. Chapin – 50p

  • [Bonk – Grading, Interest Rate, PVFB=PVFP, Mortality – Term higher than Perm]
  • Samuel P. Adams: All these methods are based one way or another on the ancient truth that the present value of benefits, expenses, and margins must equal the present value of premiums.
    • When one considers the interest assumption, it must be remembered that rates are presently very high but may be showing signs of leveling off.
      • It seems inconceivable in view of the past that interest rates will stay at their present levels for a long period of time.
      • If the interest assumption in the early policy years is taken as the rate on new investments, the actuary should allow for the possibility of a reduction after the first few policy years and provide for a more conservative rate at the later policy durations.
  • CHAIRMAN Robert W. WALKER: We also recognize the difference between term and permanent mortality with a higher mortality charge on term contracts.
  • RUSSELL E. MUNRO: We also develop our rate structure so as to reimburse our agency force on a basis which does not place the agent in an awkward position in his recommendations for his client cost per $1,000 at risk.

1968 – SOA – Premiums and Dividends for Individual Ordinary Insurance, Society of Actuaries – 30p

  • 1987 – SOA – Life Insurance Transformations, by Douglas A. Eckley, tsa87v395 – Society of Actuaries – 22p

Renewal Premiums

  • In this project, we studied a typical universal life (UL) contract issued in the United States.
    • We studied three alternative approaches of recognizing renewal premiums and their effect on expected earnings.
      • The first was to ignore their recognition until received.
      • The second was to recognize the amount of expected renewal premium, while the
      • third only recognized the minimum required premium level that would keep the contract in force.
    • Many actuaries wonder why this subject even needs to be discussed, as the answer seems obvious. Why is this an issue?
      • The problem is that these renewal premiums are not guaranteed; they don’t have to be paid and thus are not under the control of the insurer.
      • The definition of an asset is that it has to be under the current control of the entity. In fact, in sales illustrations, policyholders may not desire to pay a premium.

—  Sam Gutterman

2004 – SOA – International Accounting Standards-Current Developments, Society of Actuaries – 24p

Flexible Premium

  • Chapter 6 provides a comprehensive description of adjustable-premium and flexible premium plans, along with the development of universal life insurance. An introductory description of universal life product features is also given.
    • Black, K. Jr., and Skipper, H.D. Jr. “Flexible-Premium Life Insurance Policies,” Chapter 6 in Life Insurance. 12th ed. Englewood Cliffs, N.J.: Prentice Hall, 1994, p. 124-46.

1997 – SOA – Universal and Variable Insurance Products, Professional Actuarial Specialty Guide, Society of Actuaries – 6p

Premium Payment Options

  • The complications begin with a very simple question:
  • What's the premium for Universal Life?
    • It could be almost anything.
  • Then what's the cash value?
    • That depends on the premium.
  • It is the relationship between the premium and cash value that determines the product characteristics of Universal Life.

--  Ben H. Mitchell, [Bonk: a consulting actuary with Tillinghast in Atlanta - Years-?]

1981 - SOA - Universal Life, Society of Actuaries - 16p

  • The agent and prospect have the ability to choose almost any pattern of benefits and premiums.
  • No longer is the sale limited to one of several fixed plans of insurance from a ratebook.

1991-1992 - SOA - Final Report* of the Task Force for Research on Life Insurance Sales Illustrations, Society of Actuaries  ---  [BonkNote]

  • Universal Life Modeling Example
  • Funding Levels 
    • Universal life plans offer the policyholder great flexibility in their use of the plan -- from a term plan to an investment vehicle.
  • The funding level affects:
    • 1. Universal life commissioners reserve valuation method reserves -- In particular the r factor is the ratio of the actual fund value to the guaranteed maturity fund.
    • Since r is capped at 100%, using a ratio based on the average fund for all policies may not produce the actual reserve.

1994 - SOA - Valuation Actuary Symposium - Session 8 - Life and Deferred Annuity Liability Models - Society of Actuaries - 32p

  • Example 2 - The following table represents the assumptions for this example: back-end load universal life policy; $100,000 specified amount, death benefit option A; insured is a male, age 50, non-smoker; credited rate is 8. 75%; and six premium levels, shown below.
  • Premium Level Description
    • A - IRC Section 7702 Guideline Single Premium ($32,766.82).
    • B - IRC Section 7702 Guideline Level Premium ($3,083.55).
    • C - Target Premium of $1,374 years 1 to 20.
    • D - Target Premium of $1,374 years 1 to 10, $0 years 11 to 20.
    • E - Target Premium of $1,374 years 1 to 5, $0 years 6 to 15, and $1,200 years 16 to 20.
    • F - "ART" premium scenario, i.e. target premium in years 1 and 2 followed by minimum premium to keep policy in force.

1988-2, NAIC Proceedings 

  • Many insurance contracts offer the policyowner options regarding premium payment, benefit patterns, and policy loans.
  • This flexibility means that many different patterns of future cash flow could arise under the contract. (p6)

2002 09 - AAA - Fair Valuation of Insurance Liabilities: Principles and Method, American Academy of Actuaries - 48p

  • Carriers marketed interest rate-sensitive insurance under a host of premium payment options, including the `vanishing premium' plan.

2009 -  LC - Kaldenbach v. Mutual of Omaha - Court of Appeals of California, Fourth District, Division Three. 78 Cal.App.4th 830 (2009) 100 Cal.Rptr.3d 637 - Google Scholar-Kaldenbach-2009

  • Persons seeking life insurance for the Whole of Life have several choices: they may...
    1. buy a one-year renewable term contract and renew it annually, paying the full cost of insurance for each year
    2. buy coverage for the insured's life with a single premium payment, or 
    3. buy coverage for the whole of life under some type of installment arrangement.  (p47)

1984 - Book - Life Insurance: Theory and Practice, Robert I. Mehr

 

Vanishing Premium – Lawsuits

  • Q. Do you recall the vanishing premium litigation?
  • A (Wilcox): Very well.
  • Q. Would you agree that the sales practices that were used in the vanishing premium — in selling those policies was problematic?
  • MR. HIGGINS: Objection. Vague.
  • THE WITNESS (Wilcox): In a limited number of cases, that was true. But again, that’s a different question than you asked before.
    • Problematic is not the same as unlawful.
  • MR. PAUL: Q. Do you not believe that the sales practices used — that were at issue in the vanishing premium issue were unlawful?
  • …..
  • THE WITNESS (Wilcox): There may have been a few instances where it was unlawful. In general, it was not.

—  Deposition of Robert E. Wilcox, Former Utah Insurance Commissioner and Chairman of the Life Disclosure Working Group (NAIC)

66-1 –2012 0313 – LC – Thao v. Midland National – Document 66-1 -Deposition of Robert E. Wilcox – 09-C-1158 – 9p

1990s

  • 1995 – MDL-1061 – IN RE: Prudential Insurance Company of America Sales Practices Litigation
    • NJ 04/27/1995 08/03/1995 12/17/2003
    • 2.2 Million People, Settlement $2,200 /person
  • 1996 –  MDL -1109 – IN RE: Manufacturers Life Insurance Company Premium Litigation
    • Moskowitz, Barry Ted CAS 02/28/1996 07/17/1996 03/19/2001
  • 1997 – MDL-1186 – IN RE: Minnesota Mutual Life Insurance Company Sales Practices Litigation
    • Doty, David S MN 06/03/1997 10/06/1997 08/28/2000
  • 1998 – LC – Goldberg v Manufacturers Life Insurance (ManuLife) – New York
    • Judge: Beatrice Shainswit, J.
    • 242 A.D.2d 175 (N.Y. App. Div. 1998), 672 N.Y.S.2d 39
    • Similarly, the cause of action under Insurance Law § 2123 for misleading statements made by an insurer’s agent or representative, which survived the dismissal motion only as to HSMR and is governed by a three-year Statute of Limitations (CPLR 214), begins to run at the time the false or misleading statements are made.
    • Again, since the alleged misrepresentations were made in connection with the purchase of the policy, the three years began to run in 1988 and expired in 1991.
  • 1999 – LC – Gaidon vs Guardian
  • 1999 – LC – Goshen. Mutual Life Insurance of New York
    • 2000 – LC – Goshen v Mutual Life Insurance Company of New York
    • Judge: Beatrice Shainswit, J
  • 1999 0914 – GOV (House-Report) – Interstate Class Action Jurisdiction Act of 1999  —  [BonkNote]  —  47p
    • 39 – Equitable Life Assurance Company, an Iowa corporation, agreed to a $20 million settlement of two class-action lawsuits involving 130,000 persons filed in Pennsylvania and Arizona State courts. The class action alleged that Equitable misled consumers, in violation of State insurance fraud law, when trying to sell ”vanishing premium” life insurance policies in the 1980s. Equitable sold the policies when interest rates were high, informing potential customers that after a few years, once the interest generated by their premiums was sufficiently high, their premium obligations would be terminated. However, when interest rates dropped, customers ended up having to continue to pay the premium in full.49
      • 49 See David Elbert, ”Lawsuits to Cost Equitable $20 Mill,” Des Moines Register, July 19, 1997 at 12 and ”Cost of Settling Lawsuits Pulls Equitable Earnings Down,” Des Moines Register, August 6, 1997 at 10.

2000s

  • 2000 – LC – COLE, M.D, v. The Equitable Life Assurance Society oF the United States
    • Decided: April 13, 2000
    • Supreme Court, Appellate Division, First Department, New York.
    • 1998 – LC – Judgment, Supreme Court, New York County (Judge Beatrice Shainswit, J.), entered October 1, 1998, dismissing the complaint,
  • 2002 – LC – Russo v Massachusetts Mut. Life Ins. Co. (192 Misc 2d 349 [Sup Ct, Tompkins County]).
  • 2002 – LC – James Szymanski vs. Boston Mutual Life Insurance Company., 56 Mass. App. Ct. 367, March 7, 2002 – November 7, 2002
    • <WishList> – Victoria E. Fimea, Evan M. Tager, & Peter C. Choharis, for American Council of Life Insurers, amicus curiae, submitted a brief.
  • 2009 – LC – Kaldenbach vs Mutual of Omaha, California
  • Westchester Pennsylvania
  • Friedman v Manufacturer’s Life
  • Weathers v. Metropolitan

Required Premium

  • * Paying more than the required minimum premium can help build cash value

2023 – Prudential – Supplementing Retirement Income with Cash Value Life Insurance  –  Cash Value: Life Insurance in Retirement Planning – 2p

  • (p5) – After receiving these notices, John contacted Glasgow who had retired in 2000, to inquire why his policies would be terminating, even though he had timely paid the premiums on the policies for approximately 18 years.
  • (p) – Premium payments in addition to the planned premium may need to be made to keep this policy and coverage in force.” (Emphasis added.)
  • When questioned by Glasgow’s attorney about this language when he was deposed, John acknowledged that he understood its plain meaning:
    • “Q: What does that mean please, sir?
      • A: It means you may have to pay more to keep the policy in force.
      • “Q: All right. And you have no trouble understanding that language?
      • “A: I understand it.
      • “Q: Okay. And so you would have understood back in [19]89, when you got this policy, that you may be required to make additional premium payments in the future, is that right?
      • “A: Yes.” 
  • (p22) – John Hancock and Glasgow cannot be held liable for the negligent or wanton failure to procure insurance based on the Maloofs’ failure to pay the required premiums; accordingly, the summary judgment was properly entered on this count.

2010 – LC – Maloof v. John Hancock Life Ins. Co. – Alabama Supreme Court Opinion  —  [BonkNote]  —  39p  

Cost – Index

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Minimum Premium

  • An approach which seems to be gaining in popularity expresses commissions as a percent of a target or a minimum premium.

— Christian J. DesRochers

1983 – SOA – Universal Life (RSA83V9N212), Society of Actuaries – 24p

  • 2. As admitted by Joel Kuni, Farmer’s Product Development Actuarial Manager, in his deposition of 5-7-2003, at page 53, (a true and correct copy of Mr. Kuni’s depo excerpt is attached hereto as Exhibit 3), “the minimum premium is not sufficient and never was sufficient to keep the policy in force all the way to maturity.”

LC – Fairbanks v Farmers New World Life  —  [BonkNote]

Second Amended Class Action Complaint for Compensatory and Punitive Damages and Injunctive Relief For

  • Q: Could you describe for the jury what you were trying to convey when you drew this drawing, Exhibit 774, on the back of her illustration.
  • A: JEFFREY STEMLER – (Agent): This is — when we are sitting down talking about insurance, we try to explain to the prospects exactly how the insurance works.
    • So this is part of our talk that we give to explain how it works.
    • So this would be a build slide.
    • This didn’t just start there.
    • I drew a line on the bottom and I said: When you buy insurance, there is a minimum amount that you must pay for insurance to pay for the costs and put the policy in force.
    • And I drew the line and I wrote minimum, and I would ask who do you think sets that price.
    • Some people will say: I don’t know.
      • Others: Well, the insurance company.
      • I go, yes, you’re correct.
    • And I said: They have actuaries, and the actuaries, their job is to figure out how much they need to collect for any given amount based on the age of the person so that they can cover the risk and also still make a profit.
    • I said: But there’s another line that we need to be  concerned about, and then I draw the line up on top and I put the max there.
      • And I say this is the maximum you can pay for a contract.
      • I said: Do you know who sets that limit?
      • People will often say: Well, the insurance company; right?
      • And I say: No. It’s actually the government.
    • In the example we’ll often say: Well, let’s just assume that this is $500,000 that we are dealing with here and the minimum premium is a thousand dollars and the maximum premium is $5,000.
      • Why would anyone put $5,000 into a contract if you could buy the same amount of coverage for only 1,000?  (p40-41)

2015 – Walker vs Life Insurance Company of the Southwest – TRIAL DAY 11

  • Case 2:10-cv-09198-JVS-JDE Document 820 Filed 12/01/15 Page 40 of 279 Page ID # 33532
  • Both policies issued to Smith by Central Life were flexible-premium adjustable life-insurance policies, known in the insurance industry as universal life-insurance policies.  
    • Both the premium and the death benefit are flexible in a universal life-insurance policy.  
    • Smith’s policies provided for the payment of a “planned premium.”  
    • AmerUs states that a planned premium is the product of a discussion between the agent and the client as to the amount of the premium the client wishes to pay for the policy.
    • The premium is set in a range, with a minimum premium at the low range and a maximum premium at the high range.

2008 0919 – LC –  AmerUS Life Insurance Company v. Bobby Ray Smith al., 1061535., Supreme Court of Alabama. Decided: September 19, 2008 – [link]

  • * Paying more than the required minimum premium can help build cash value

Prudential – Cash Value: Life Insurance in Retirement Planning – [link]

Premium Financing

  • 2011 0629 – Forbes – Wild Pitch, by Deborah L. Jacobs – [link]
    • Merill Lynch, Pacific Life, Minnesota Mutual
  • [Lawsuits]
  • 2024 0418 – The Granddaddy of All Premium Finance Litigation, by Larry J. Rybka, Chairman and CEO at Valmark Financial Group – [link]
    • Stephen C. Baker recently posted about a mega premium finance case that is currently being litigated in New York in the case of Aronson v. Brave Strategies, LLC.
    • Besides involving $150 million of total death benefit across three carriers, what makes this case notable is that it is based on an alleged violation of New York’s Best Interest standard of care. 
    • See Stephen’s blog post here.
    • [2024-09884]
  • E. What are the advantages and disadvantages of the “Bank Loan Plan” under which a policyholder purchases a limited payment life policy and borrows part of the premiums at a bank, thus obtaining an interest deduction for Federal Income Tax purposes?

1953 – SOA – General – Society of Actuaries – 11p

  • Financed Insurance
  • A. What lapse experience has developed on business financed at or near issue through either policy or bank loans?
  • B. Is the amount of such financed business increasing or decreasing and, if so, why? What measures have been taken to limit the amount of such business and what are their merits and demerits?
  • C. To what extent is the exercise of the Fifth Dividend Option in practice being confined to policyholders interested in minimum deposit policies, and why?

1961 – SOA – Individual Life Insurance: Financed Insurance, Society of Actuaries – 5p

Premium Taxes

  • The States feared the loss of large revenues received from taxation of the insurance business.1  (p221)’

1948 – LR – Statutory Regulation of Life Insurance Investment, by W. Page Keeton – 21p 

  • As you may know, Alabama has a $1.3 billion per year insurance business, resulting in $240 million of insurance premium taxes every year.
    • A proposed optional Federal insurance charter not only could reduce this important source of State revenue in an era of tight State budgets and dwindling State income taxes but will also threaten the ability for States to adequately fund their State insurance departments.
    • Issues such as state insurance premium taxes must be addressed as part of any optional Federal insurance charter.  (p6)

—  Senator Spencer Bachus (R-AL)

2003 1105 – GOV (House) – Reforming Insurance Regulation: Making the Marketplace More Competitive for Consumers – [PDF-200p, VIDEO-?] 

  • By the 1940s, taxation of insurers was the single largest source of revenue to the states.
  • Thus, when the Supreme Court reversed itself in 1944, ironically in an antitrust action under the federal Sherman Antitrust Act, and held that the business of insurance was “in or affecting interstate commerce”, the states faced the loss of a significant source of revenue.
  • Utilizing their own trade association, the National Association of Insurance Commissioners (the “NAIC”), the states drafted and the next year with a few modifications Congress enacted legislation, the McCarran-Ferguson Act, exempting the business of insurance from federal antitrust laws to the extent regulated by state law.
  • Since 1945 the states in the United States have continued to be the regulators of insurance even as taxation of insurance has declined as a relative source of revenue to state treasuries.
  • Attached hereto as Appendix A is a summary of the McCarran-Ferguson Act and of recent judicial decisions interpreting the Act.  (p201)

1998 – OECD – Competition and Related Regulation Issues in the Insurance Industry, Organisation for Economic Co-operation and Development –  272p

  • MR. BRONSTEIN: One of the things we noticed, too, was that on 1035 exchanges on life insurance products, we couldn’t identify one of the systems.
    • At least the output couldn’t identify that it was a 1035 exchange, so we were paying premium tax twice.

2001 – SOA – Data Quality, Society of Actuaries – 25p