Because people are living longer, they need to be insured longer. Starting Jan. 1, 2008, new life insurance policies will have to abide by new federally-mandated rules designed to make sure insurance carriers have enough reserves on hand because people are living longer.
The change includes a new mortality table. The new table, called the 2001 CSO Mortality Table, includes a final maturity age of 120, reflecting improvements in health care and life expectancy.
The 1980 CSO Mortality Table, the most recently compiled before the 2001 table, had a final maturity age of between 95 and 100 years.
The latest change won’t mean much for average citizens who use life insurance in a traditional manner – to help provide for their families after their death.
However, for business owners who are using life insurance policies for succession planning, buy-sell agreements or deferred compensation, there could be complications, said Meridee Maynard, senior vice president of life products with Milwaukee-based Northwestern Mutual Life Insurance Co.
Current rules governing life insurance polices allow for policy-holders to overpay their premiums by certain amounts. However, once policy-holders exceed a defined amount, their accounts are deemed modified endowment contracts (MECs), which are subject to higher levels of taxation when distributions, loans, withdrawals or surrenders are withdrawn and the policy-holder is living.
"No one really wants an MEC," Maynard said.
When the new rules governing life insurance take effect on Jan. 1, 2008, criteria that designates life insurance polices as MECs will be tightened. As a result, Maynard believes, many business owners who want to put extra money into their policies will purchase new life insurance policies before the end of 2007.
"That will be the blue light special," she said. "Companies that want to use cash value life insurance as a means to accumulate money will be beefing up their contracts before 2008."
Policies purchased before Jan. 1, 2008 will be grandfathered, allowing policy-holders to put more money into their policies than those bought after the change.
"If you are thinking about this, there is an incentive to do it before January 2008," Maynard said.
One of the popular myths about the change has been that insurance rates will decrease, Maynard said.
"Every insurance company has already taken into consideration the better mortality (rates) when they do their pricing," Maynard said. "I don’t think people understand that insurance companies have used their own experience to determine what premiums should be charged."
Insurance mortality tables have been around since 1941 and have been updated in 1958, 1980 and 2001, Maynard said. The tables are used mainly to set statutory reserves for life insurance companies.
When the 2001 CSO Mortality Tables were first announced, there was widespread speculation that life insurance rates would fall because of the longer periods to pay for policies, said John Christensen, chief actuary for the life and health division of Madison-based American Family Insurance.
"Initially, we saw that we would reduce our rates by about 30 percent," Christensen said. "But there were other factors to take to term. Overall, I think that the key is that life insurance is still a good value, and if this allows rates to decrease, that’s a good thing."
American Family uses the change in mortality tables to offer a new 30-year term life insurance product. The new product was offered for the first time last year.
"It has allowed us to take individuals that want to have (life) insurance for longer term," Christensen said. "People are living longer. As the 2001 CSO table came out, it allowed us to reduce our reserves and allowed us to price the product so it has a longer life."
