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Update News for June 2008
Here is a quick run-down on what you will find in this bulletin:
These topics will be dealt with in more detail throughout this bulletin.
Our goal was to roll out our new CI comparison software during May but we were delayed on two fronts.
First, we had a number of small bugs to address in our new forms retrieval software. The bugs turned up as we began creating forms retrieval sites for individual companies. At this point we are very close to wrapping up those bug repairs and should have no problem putting it behind us in June.
Second, one of the U.S. companies rolled out a number of new ROP level premium options in May. The new products, which we think will be quite popular, necessitated the creation of 4 new ROP categories in our U.S. software. Anytime we add new categories there is a significant amount of work because the changes must then be migrated through our entire line of programs: Windows, Palm, Windows Mobile, Linux (web) and NT (web) versions of the software.
We realize that ROP term life insurance is of little concern in Canada due to the fact that in the early 1980's the tax rules changed. Prior to the early 1980's any cash that you received back from a life insurance policy (while the insured was alive), which did not exceed the premiums you had paid into the policy, was tax free. After the 1980's the Canadian tax rules changed. The new rules determined that the amount you could get back tax free was reduced by the relative cost of insurance each year, on an accumulating basis.
The logic of the government was pretty simple. Part of your premium went to provide insurance, and part of your premium was an over payment that went to fund future benefits in the policy. If you got money back, the money was a combination of the over payment and any investment return it earned, meaning that some of the cash was tax paid capital, and some of the cash was the deferred earnings on that capital. It makes perfect sense.
However, the U.S. tax rules are the same as the pre-1980's Canadian tax rules. Once again, the amount you are allowed to get back tax free, is equal to the premiums you paid. Because of this, ROP term is an attractive product concept. In essence the consumer pays a premium higher than they would have otherwise paid for their level term product, and at the end of the initial level term period, the consumer can receive back all the premiums that they paid - tax free under current rules. Of course if the U.S. changes its tax rules in the interim, those products could become as taxable as they would be in Canada - which is why you don't find ROP term in Canada.
Why share all of this trivia with you. Please keep reading, it has an interesting implication for Critical Illness Insurance products in Canada - and you should be aware of it.
Compulife's CI premium comparison will be based upon the following 4 types of Critical Illness coverage. They will be:
Once we introduce Critical Illness in June, you will be able to select Critical Illness from the Red Master Menu. This will be a new button that will follow the Joint Life button. As you do with Joint Life, the Critical Illness button will take you to a separate Master Menu. The Joint Life menu is blue, the new CI menu will be yellow.
The 4 types of CI coverage will appear in the bottom left corner of the Enter Client Information window, in much the same way as the types of joint life products appear in the bottom left corner of the joint life client entry window. Once you select the type of CI policy, that group of policies will be available when you click on the comparison option. Again, this is all consistent with the function of Joint Life quotes, and so we think the transition and learning curve will be short.
As we mentioned at the beginning, there is no ROP term life product in Canada but there are ROP Critical Illness policies. Essentially there are two ROP options, one that returns premiums on death, the other that returns premiums on death or at the expiry of the policy.
IMPORTANT: Both ROP options assume there were never any CI claims.
The difference between the ROP on death option, and the ROP option, is that the ROP option provides for a full or partial refund of premiums on cancellation or expiry of the CI policy. The largest percentage of any refund is available at the point where the policy matures/expires. When the policy expires the owner may get all the premiums back, or a large portion of those premiums. Some policies provide smaller percentages of refunds if the policies are cancelled midway.
ROP on death means that if the insured dies the beneficiary will receive all or a significant portion of the premiums as a death benefit. If the insured lives beyond the expiry date of the policy, and there has been no CI claim, then there is no ROP benefit at the expiry point.
Policies with an ROP on death benefit are generally more expensive than CI policies that have no ROP benefit at all. However, ROP on death products are considerably less expensive than policies that have ROP which pays upon termination of the policy for reasons other than death. So in the menu above:
the first 3 CI options are arranged in logical order of ascending cost.
Compulife assumes that the interest in ROP on CI policies flows from the notion that these potential future refunds of premiums will not be taxable. We would underline that subscribers need to be cautious in offering advice that the Return of Premium will be tax free in the future, given the way that the Canadian government already is taxing cash benefits paid out of life policies. As discussed before, current tax rules in Canada reduce the adjusted cost basis of the policy (the amount of cash you get back tax free) by a relative annual cost for the insurance benefit received each year (that cost accumulates). While the government is NOT currently doing that with CI policies at this point, we suspect if CI gains in popularity, that they could apply the same logic making part of any ROP benefit taxable.
And don't think grandfathering will bail you out. I was around in 1982 when the tax rules changed in Canada, and existing policies that were grandfathered still had tax problems from that point forward. And because of the way ROP products heap cash to the end of the policy's life, and no cash at the beginning, grandfathering could mean absolutely nothing to the policyowner. All we are saying is be very careful when discussing the taxability of ROP CI products.
ROP on death will likely be of less concern in that the benefit is paid ONLY on death of the insured. As death benefits of life insurance policies are tax free under current tax rules, one cannot imagine how an ROP benefit triggered by death would be taxable.
The option of CI combined with life insurance is very much like the ROP at death option, except that the total coverage of the policy is paid on death, not just an amount equal to the premiums paid. From another perspective, ROP on death is a CI policy combined with an increasing face amount term policy, where the face amount is equal to the premiums paid.
The CI combined with life insurance is comparable to a situation where someone purchased both a CI policy and life insurance policy separately. One assumes that buying the two together leads to overall cost savings, particularly given the fact that if you owned two separate policies you would be getting two potential benefits. The first benefit (CI) would pay when you got a serious disease, the second would pay if and when the serious disease killed you. We assume that most combined policies pay one or the other, not both.
I suspect that the insured would be better off with two policies, particularly given the fact that in most cases the life insurance coverage should be substantially higher than the CI coverage - at least in the classic need scenarios where there is a significant need for life insurance. And as most realize, adding $100,000 of coverage to a $1,000,000 policy, is a lot cheaper than buying a $100,000 policy. We suspect most buyers will be better off with separate products.
This combined type of policy also seems similar to life insurance products that offer living benefit options or riders. These are more common in the U.S. but the living benefit, as a life insurance rider, tends to focus more on situations where the health problem of the insured is much more certain to lead to death - meaning coverage is much less broad than a CI policy and the cost of the rider is less than a CI policy would cost.
Compulife has received some advice and feedback on the disclaimers that we will display at the top of CI comparisons. You will see following at the top of premium comparisons on screen:
The same warning will be displayed at the bottom of printouts and will refer to "the above comparison" rather than "the following...".
As we indicated last month, and until such time as the web site CIAnalyzer.com (CIAnswers.com will also point to that site) is ready to go, the only way that Compulife subscribers will be able to review the coverages in the different CI policies is to review the sample policy documents that will be available in our software.
We have written to several Canadian companies and advised them that we will need PDF file copies of their sample CI policies, and cannot add their rates to our system until such documents are made available. We suspect that this may lead to some delays but we think it is important that our subscribers be able to review the actual benefits and conditions contained in the various CI policies.
One life insurance company, Unity Life, has already responded to our request for sample policies and so we have added Unity's 3 CI products to our CI database. They have two options, ROP and ROP on death. This initial data gives us the foundation to begin testing the new CI comparison software that will be developed in June.
We will continue to work to add other companies, as their rates and sample policy files come in. If you have a particular product you like to sell, please help us by putting a fire under your company contact.
As we have noted before, the work on the program should go quickly in that the CI comparison module is really a revision on our existing system. The rate quoting aspect will rely upon the life quoting technology.
The sample policy documents will actually be a variation on our new Forms retrieval technology and CI sample policies will simply be a new class of forms in our system. This means that all the technology that we developed, for storing and retrieving PDF forms, will be used for the CI project. It's nice when one good thing leads to another.
To summarize, adding CI amounts to manipulating existing software that we have already built, as opposed to building something completely new. This is why the project should go quickly. We anticipate the biggest delay being life companies providing us with the data.
The www.cianalyzer.com web site development will follow the above work to our PC based software. CIAnalyzer will attempt to offer agents (agents only) tools to compare and contrast the differences in coverages between policies. The site will be password protected and only available for use by agents.
As you will note from our earlier discussion, Compulife has wrapped up work on our on-line forms retrieval system. With that complete we are now anxious to get some Canadian life companies into our forms library.
We have spoken with a handful of Canadian companies who have expressed interest but no one wants to be first. With that in mind Compulife is offering a one year free subscription to the first company to provide Compulife with their application and service forms for our forms library.
Once again, the first Canadian life insurance company to provide us with forms gets one year of Compulife for FREE - that's a $299 value. The second company to provide us with forms will receive 6 free months of software.
In order to help motivate the companies, the agent/agency subscriber to Compulife, who is influential in getting the first company's forms into Compulife, will also receive 12 free months of Compulife for FREE. In all cases these free subscriptions will be added to the time left on any existing subscriptions.
So how about it? Would you like the convenience of getting life company forms from Compulife? Our U.S. subscribers do.
During March significant improvements have been made to our websites, both www.compulife.com and www.term4sale.com. The changes make our websites more attractive on the new generation of wide screen, LCD displays.
We think the new pages are better organized and look more professional. The question is, did anyone notice? Tell us what you think? Do you have any suggestions?
We have now obtained the software and hardware that we need to begin offering on-line tutorials. During June and July we will be developing and adding tutorials to our web sites. From our website you will be able to link to a Windows media program that will give you a multi-media tutorial combining video, computer image displays and voice instructions on how to use our software.
The concept will be based upon a two person audio track where Jeremiah and Bob will actually discuss the software and its use during the course of the tutorial. For those of you who have listened to director/producer audio tracks provided with many DVD versions of movies, you will understand how this will work. In our case, one will instruct the other, and you will see the instructions followed on screen. This will ensure that you get to hear and see how it is done and that we don't make any jumps you can't follow.
Tutorials will be short and topically arranged. For example, the first tutorial will be an audio visual presentation of the Dare to Compare Challenge, which is a training tutorial we use for first time users. Someone will actually be able to sit and watch us do that tutorial in the tutorial video. For many who are very inexperience with computer, this will be useful.
The next tutorial in Canada will explain how to use our Income Replacement Calculator. We think that function in the software is a hidden gem and can make it much easier to demonstrate why your client needs more insurance than they would otherwise purchase. Apart from buying the wrong types of insurance, we are convinced that the biggest problem in the market is that most people do not purchase enough life insurance, a mistake that is hard to correct after the insured is dead. The Income Replacement Calculator addresses the problem, and we'll show you how it is used and explain how to explain it to the consumer.