Policy Owner Control

The spectrum of control ranging from insurance company to policy owner varies greatly in different policies.

In the early 1980s when interest rates were at their peak, I was asked by a client to find him the best deal on a term life insurance policy with a large face amount. He specified that he needed it for only 5 years. I searched the marketplace and prepared a spreadsheet comparing 17 different policies. All had different costs for the same face amount, and all gave different amounts of control to the policy owner. The insurance companies were competing fiercely for premium income at that time because they could invest those incoming dollars at the high interest rates available then.

The least expensive choice was a reentry term policy that required reentry in 5 years. Given 20/20 hindsight, it isn't surprising that it was offered by Executive Life. Reentry means the insured has to reapply for the policy and qualify for another 5 years by passing a new physical exam and financial inspection. If he passed, he would get the lower reentry rates. If he did not pass, the insurance company would charge the much higher guaranteed rates listed in the contract. This was the policy that was put in force.

Five years passed quickly, and the client's dynamic life had not slowed down. He wished to continue the policy, so we applied for reentry. I breathed a sigh of relief when he passed the physical with flying colors, and we fully expected the lower rates to be continued. But Executive Life said no! It did not matter that the insured had done all that was required; Executive Life would not offer the lower rates because "its re-insurers would not provide the coverage at the lower rates." Interest rates had tumbled.

Executive Life was not that interested in that type of business any longer. Just imagine the situation that both the client and I would have been in if his health had deteriorated to the point where he was age limit, and a convertibility feature that would allow the policy owner to change that policy into any of the investment policies offered by the issuing company. We learned two lessons: (1) It costs more to maintain policy owner control, but it is worth it, and (2) it's amazing how needs for life insurance change over time but do not necessarily go away.

The representative rates for yearly renewable and convertible term insurance. These rates are higher because the insurance company now must continue to renew the policy at the policy owner's option. The convertibility feature gives the policy owner the added option of changing the policy without charge, so a higher premium is charged for a policy that is renewable and convertible. This is referred to as quality term insurance because it gives the policy owner greater control, as opposed to non-guaranteed term which gives the insurance company more control.