Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Insurance
Reexamination Certificate
2000-10-24
2002-09-24
Rimell, Sam (Department: 2166)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Insurance
C705S002000
Reexamination Certificate
active
06456979
ABSTRACT:
FIELD OF INVENTION
This invention relates to a method for evaluating financial information, and more specifically to evaluating permanent life insurance policies for cost and performance criteria.
BACKGROUND OF THE INVENTION
The permanent life insurance product is the most complex financial instrument that is purchased or owned by the general market of consumers, combining the benefits and costs otherwise found in insurance and investments into a single financial instrument. For instance, like term insurance, all permanent life insurance policies pay a death benefit. All permanent life insurance products include some form of a term-insurance-like “risk” premium, usually referred to as the Cost of Insurance Charges (herein “COIs”). In addition to this death benefit, all permanent life insurance products include a living benefit in some form of account value, commonly referred to as the cash surrender value. This account value is the surplus or excess premium paid into the policy above and beyond the various policy charges, and is invested into either the insurance company's general account of predominantly bonds and mortgages in the case of universal life products, or a variety of mutual-fund-like separate accounts in the case of variable life products. All permanent life insurance products include policy charges for investment management fees, investment advisory fees, and fund operating expenses, like Certificates of Deposits and mutual fund investments. Also like some mutual funds, permanent life insurance products can include a charge that is deducted from contributions to the policy, commonly referred to as a premium load. Lastly, permanent life insurance products can assess or include additional policy charges unique to the permanent life insurance products itself, like state premium taxes, federal deferred acquisition costs (herein “DAC”) taxes, fixed or flat administration charges, and Mortality and Risk Expense (herein “M&E”) charges.
While owners of whole life insurance, and other similar permanent life insurance products have always paid either some or all of the above charges, these charges had been “bundled” into an overall “fixed” policy premium calculated based on these underlying pricing factors, but were known only to insurance company actuaries, and were hidden from view of the policy owner. However, with the introduction of universal life in 1986, these policy charges were “unbundled”, disclosing for the first time the individual policy pricing components as to COIs, premium loads, fixed policy expenses, and account-value-based charges. At the time, this information was only available through the duly licensed agent of the life insurance company underwriting and distributing the given product, or from the insurance company itself. While policy expenses were “unbundled”, this information was not widely available, was almost never separately evaluated, considered or included in the decision to purchase a particular product, and was customarily only disclosed or communicated by virtue of an annual statement for the policy produced on the policy anniversary (i.e. more than 1-year after the purchase of the given policy). With the advent of variable life insurance products, the level of disclosure has increased to further disclose and publish for general public consumption all guaranteed pricing factors determining the maximum policy charges, and most of the current pricing factors reflecting the policy expenses currently applicable. Of the 4 basic types of charges: (1) COIs, (2) Premium Loads, (3) Fixed Policy Fees, and (4) Account-Value-Based charges, all are disclosed and published on both a current and guaranteed basis, except COIs. Because these COIs are typically the most influential determinant of policy pricing, contributing as much as 75% of the total premium of a given policy, any comparison of policy pricing that does not include COIs is at least inconclusive, and potentially misleading.
Cost of Insurance Charges (COIs)
COIs are deductions from permanent life insurance policies to cover anticipated payments for claims. As with most types of insurance, claims are, and arguably should be, the largest single cost factor of any insurance policy (if claims are not the largest single cost factor, then is the product really insurance against the risk of some claim, or something else?). With life insurance, COIs typically account for about 75% of the total premium, and, as expected, the higher the claims, the higher the premiums. COI charges are calculated year-by-year as the result of the policy death benefit (see net amount at risk below) multiplied times a COI rate provided by the insurance company for each age corresponding to each policy year for each product. These deductions are much like term life insurance premiums in that they are predominantly for claims paid during a given period (typically 1 year). For this reason, COIs are frequently referred to as the pure “risk” portion of the premium, reimbursing the insurance company for the risk associated with paying the death benefit. Because the risk of death increases with age, so do the COIs.
For example, assume an insurance company provides permanent life insurance for a group of 1,000 policyholders whom all are insured for $100,000 and three (3) insureds out of the group of 1,000 die in a given year. The insurance company pays $300,000 to the beneficiaries of those three insureds. The insurance company must collect $300 from each policy owner over the course of the period in order to pay this $300,000 in claims (i.e. 1,000 policyholders×$300=$300,000 in death claims paid). In this case, the COI Rate would equal $3.00 per $1,000 of death benefit (i.e. each insured paid $3.00 multiplied times 100 for each $1,000 of death benefit).
Of course, as the average age of the population of 1,000 in the group ages, then the risk of more deaths increases. For example, the next year, all insureds are a year older, and because the probability of death increases with age, we assume that four (4) insureds out of population of 1,000 die in this next year (for simplicity sake, we will assume that the insurance company sold three (3) new $100,000 policies to replace the three $100,000 policies removed from our pool by the three deaths in the prior year). The insurance company will pay $400,000 to the beneficiaries of those four insureds. The insurance company must collect $400 from each policy owner over the course of the period in order to pay this $400,000 in claims (i.e. 1,000 policyholders×$400=$400,000 in death claims pad/to be paid). In this case, the COI Rate would equal $4.00 per $1,000 of death benefit (i.e. each insured paid $4.00 multiplied times 100 for each $1,000 of death benefit).
This example also assumes the insurance company collects only the exact amount necessary to pay these claims. However, in reality, the insurance company must also collect a profit to remain in business. Actual COIs in this example would, therefore, be slightly higher to cover anticipated claims, but then also to provide a profit to the insurance company providing the insurance and bearing the risk. In addition, some insurers “load” the COIs to cover other policy expenses that are not disclosed elsewhere. For instance, some policies are marketed as “no-load” or “low-load” policies, and as such do not disclose certain policy expenses or loads. The expenses or loads that are typically “hidden” are sales loads, and other premium based loads. However, because certain premium based loads must be paid (e.g. state premium taxes, federal deferred acquisition costs (DAC) taxes, and the cost to distribute the policies), some insurers “hide” these costs inside “loaded” COIs.
As mentioned above, in all cases, these COIs are calculated each policy year as the result of the policy “net at risk” death benefit multiplied times a COI Rate provided by the insurance company for each age corresponding to each policy year for each product. This “net at risk” death benefit is that portion of the total death benefit i
Hopen Anton J.
Rimell Sam
Smith & Hopen , P.A.
The InsuranceAdvisor Technologies, Inc.
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