Is Your Life Insurance on an Outdated CSO Table Making Higher Profits for the Insurance Company?
CSO Tables
Different insurance companies may use different CSO tables, which is an acronym for Commissioner’s Standard Ordinary mortality table. Is your life insurance reviewed periodically to be sure you have the right amount and type of coverage?
The 2001 CSO tables were required for new policies starting in 2009. Overall, they reflected about a 20% reduction in mortality costs due to our living longer. The new CSO 2017 became effective in Arizona as an option in 2017.
2017 CSO Mortality Table
Based on LifeTrends article by Timothy C. Pfeifer, FSA, MAAA
Since the 2001 table was developed, the industry has changed in many ways. Examples include much greater experience with preferred risk mortality, more accelerated underwriting, more experience at larger face amounts, and more knowledge relative to causes of death.
Generally speaking, mortality rates under the 2017 CSO Table are lower than the 2001 Table.
As the 2017 CSO Table becomes more widely in use the mortality standard for calculating minimum cash values, minimum statutory reserves, and the minimum death benefit to premium/account value relationship for federal tax law compliance as life insurance.
The impact of the adoption of the 2017 CSO on product design is a significant driver of when insurers will elect to adopt the new table. All else equal, adoption of the 2017 CSO Table will lower statutory reserves (and lower prices for most policies).
Between January 1, 2017, and January 1, 2020, insurers can elect to develop new policy forms using the 2017 CSO Table, or they can retain the 2001 CSO Table until January 1, 2020.
For products built around cash accumulation and the payment of as large amounts of premiums as possible per $1 of death benefit, the impetus to adopt the 2017 CSO Table for such policies is lower, and for such products, insurers may wait until January 1, 2020, to introduce the 2017 CSO. This is because, under the new table, the maximum premium that can be paid per dollar of death benefit is lower.
Although the general pattern of adoption is expected to be early for price-sensitive products and later for heavily funded contracts, many policies will fall in the middle, and companies will sequence product launches to smooth out their product development efforts.
Principles-Based Reserves (PBR)
For over 150 years, life insurance companies have calculated statutory reserves (reserves reported to state insurance regulators) using fairly basic actuarial formulas. These formulas have used conservative variables, so the resulting reserves were often much larger.
About fifteen years ago, both insurers and regulators began an effort to change the formulaic approach to reserves and replace it with an approach that involves sophisticated actuarial modeling of a company’s projected liabilities in light of its own experience. This approach has been utilized in Canada for many years, with much success.
Under PBR methods, the reserve that must be held by an insurer is the greatest of three separately calculated values; one is a formula-based value and the other two result from sophisticated models that can reflect the insurer’s own relevant experience. These models must reflect a specific company’s credible recent company experience, where it exists, plus a provision for conservatism.
What is the expected impact of PBR?
The consensus is that term reserves will be reduced, especially if adoption of PBR is coupled with the adoption of the 2017 CSO Table. Thus, term prices for many companies should decline. Since the cash value still acts as a floor on statutory reserves, PBR for heavily cash-value-oriented life products (VUL, UL, IUL) should not change much.
All products must use PBR methods for new life business issued on or after January 1, 2020. If a company adopts PBR for a policy form, it must also adopt the 2017 CSO Table for that policy form at the same time. The converse is not true. Between January 1, 2017, and January 1, 2020, life insurers can selectively choose which policy forms to migrate to PBR.
As might be expected, a material number of companies have developed term life products using PBR methods and the 2017 CSO Table since January 1, 2017, to lower prices.
Dave's Action Plan
With your signature, we can usually get an "in-force" illustration of your current policies. Alternatively, you can request it from your insurance agent.
An in-force illustration shows the results of what has happened since the initial policy was issued. It includes future projections based on current assumptions. In-force illustrations are critical tools for evaluating the performance of your policy over time. You should obtain an in-force illustration of your policy periodically to assure that your policy continues to meet your objectives.
We can compare your current policy against a wide range of currently available policies from many companies to evaluate and make any recommendations. Your objectives or insurance needs may have changed. If a change is prudent, you can do a tax-free (1035) exchange between life insurance policies.
For example
1) As folks age (most of us do), there may be less need to support grown adult children, or you may have accumulated a larger nest egg that could mean a lesser reliance is required on life insurance.
2) You may want a policy that is less focused on life insurance and more on "tax-smart" retirement income that some well-structured policies can provide. In this case, you may want a policy that is based on the 2001 CSO Table, not the 2017 CSO Table.
3) You may not need as much - or any - life insurance and can divert some or all of the policy value to investment alternatives. However, you may want to avoid the risk of the stock market or the interest rate risk of most bonds. Alternatively, you may seek equity market growth by participation in part of equity gains without downside risk, backed by a strong insurance company. All guarantees are based on the claims-paying ability of the insurance company. For more details see Dave's Whitepaper: "Time to Reduce Equity Risk? - Participate Yet Protect Alternatives.