Patent Issued for Systems and methods for building and managing an integrated permanent life insurance product using individual term and annuity policies (USPTO 11948206): AmerUs Group Inc.

2024 APR 18 (NewsRx) -- By a News Reporter-Staff News Editor at Insurance Daily News -- AmerUs Group Inc. (Clive, Iowa, United States) has been issued patent number 11948206, according to news reporting originating out of Alexandria, Virginia, by NewsRx editors.

The patent’s inventors are Clark, Brian J. (Clive, IA, US).

This patent was filed on August 18, 2023 and was published online on April 2, 2024.

From the background information supplied by the inventors, news correspondents obtained the following quote: “The life insurance industry consists of permanent life insurance, term insurance, annuity and other qualified additional benefit products such as disability income. Product designs evolved over the years to provide policy owners more choices on aspects such as premium flexibility, adjustable death benefits, crediting strategies linked to external indices, and guarantees on premiums and periodic withdrawals. A historical review of some important innovations will provide context for the significance of this invention.

“Until the early 1980s, life insurance products basically consisted of whole life (herein referred as “WL”) and term insurance. WL products are often viewed as complex and inflexible since they impose high penalties for surrendering the policy for cash. Premiums and death benefits are typically fixed while cash values and dividends are communicated with little transparency how those benefits are derived. WL appeals to policy owners seeking a combination of lifetime guarantees on the death benefit and cash value for a guaranteed level premium.

“In the early 1980s the industry responded to the demand for more transparency and flexibility with the creation of a permanent life insurance product known as universal life (herein referred to as “UL”). UL policy values are more transparent on contributions and expense deductions that create the account that earns interest (for fixed products) or is invested in market-based sub-accounts (for variable products). Policy owners have flexibility on the timing and amount of premium deposits, subject only to policy minimums and IRS maximum limits to preserve favorable tax treatment. The policy face amount can be increased (with evidence of insurability) or decreased as policy owner needs change. The original vision of UL combined lower cost term insurance with cash value growth in a permanent life product for better transparency, more flexibility, lower cost and tax efficiency.

“Innovation soon emerged in the UL product’s credited rate mechanism. Fixed products began offering credited rates linked to a stock market index while providing downside protection (e.g., credited rate can only be zero or positive). Variable UL products allow the policy owner to participate directly in markets with equity and bond sub-accounts, providing the potential for greater returns along with the risk of a market-based loss. Similar innovations were developing with annuity products.

“Innovations on other guarantees emerged. UL products began offering level guaranteed premium features that mirrored WL’s central benefit of a guaranteed level premium but at a substantially lower premium level. This was an important feature for policy owners since UL policies offer premium flexibility but also bring the risk of policy lapse if the cash value goes to zero. This “no lapse guarantee” premium provision provided the policy owner assurance the policy would not lapse provided they paid at least the stipulated premium level.

“UL innovation on the “no lapse guarantee” evolved to allow customization. A UL policy could be designed by the policy owner to function like a level guaranteed term policy for a specified number of years (e.g., like a 30-year term policy, or “30YT”) or a lifetime guarantee premium like a WL policy. Innovation was blurring the distinction between insurance product categories with respect to premium guarantees to ensure coverage.

“Annuity providers began providing guaranteed lifetime distribution benefits. Known as a guaranteed minimum withdrawal benefit (“GMWB”), these annuities met the consumer need of lifetime income payments they could not outlive while still providing a death benefit and cash value. Fixed indexed deferred annuity providers innovated with the creation of “Income Accounts” whose sole purpose was to determine the available GMWB independent of the annuity’s credited rate performance. Variable annuities offered versions of GMWBs that “stepped up” if the underlying performance of the cash value met specified performance targets.

“More recently innovation on UL and annuity indexed crediting strategies has shifted from standard stock market indices like the S&P 500 to alternative indices, such as hybrid stock and bond indices or custom-built “volatility controlled” indices.

“While the annuity market created innovative solutions on GMWBs, permanent life insurance has not kept pace with innovative solutions regarding systematic distributions of cash value on a guaranteed basis. Due to a variety of hurdles, cash value distribution options from a permanent life insurance policy are usually offered on a non-guaranteed basis. Policy owners can take cash withdrawals or policy loans, but such distributions are only available to the extent the policy has cash value.

“Comparing Universal Life Vs. Combination Term and Annuity

“The modern-day version of UL has evolved to an expensive version of non-guaranteed yearly renewable term insurance (“YRT”) with a cash value account. FIG. 1 provides detail on a typical indexed UL policy issued to a male aged 45 for $1 million face amount. In this example, the death benefit is the $1 million face amount plus the policy’s account value (known in the industry as option B death benefit).

“The sample indexed UL policy in FIG. 1 has five different types of expense charges. The cost of insurance deduction is not guaranteed at the illustrated level. Some expenses are a fixed amount while others are linked to the premium paid and the account value. Combining all five expense charges, this policy is expensive term insurance when compared to a typical 30YT policy that has a level guaranteed premium for all 30 years (far right side of FIG. 1). Over the first 30 years, the UL’s expenses are $206,303 vs. $65,400 for the 30YT policy for the same $1 million of life insurance coverage. In both examples in FIG. 1 the total death benefit is $1 million plus the account value.

“In FIG. 1, the UL’s account value is illustrated or “projected” at 5.73% for five years, then 6.3% thereafter due to a bonus. In contrast, the policy owner buying the 30YT policy and putting the excess premium into a fixed indexed annuity credited rate is illustrated to earn 3.65%. The difference in illustrated credited rates relates to company and industry practices on index cap management practices between life insurance and annuities. Annuity rates are based on current investment conditions whereas UL policies are usually based on company portfolio yields (e.g., the company’s yield on assets backing the product; in other words, bond yields available in the past 10-15 years). Over time the differences will likely converge as both products are investing new premium at similar yields. Many policy owners may not understand this practice. Buyers may compare the illustrated rates and assume the differential will always exist.

“In other words, the UL policy’s projected performance relies on the higher credited rate to cover the higher expenses. Even if the higher credited rate materializes, the illustration assumes the policy owner consistently pays the high premiums. A UL policy owner experiencing financial hardship and needing to lower the premium funding will end up with relatively costly insurance. In contrast, the policy owner purchasing the 30YT could put the excess premium into an annuity as they are financially able to do so. FIG. 1 shows that the term and annuity combination can outperform the universal life policy for almost 20 years despite crediting a substantially lower earned rate on the account.

“Higher agent commission is one reason for the higher costs in the UL policy vs. the 30YT. FIG. 2 compares the typical sales costs for UL versus the 30YT and annuity combination. Life insurance companies typically pay the same or similar commission rate on a WL or UL product as they do on term products. In effect, the excess premium that builds cash value pays out substantially higher commissions on UL than premium paid to an annuity. The policy owner ultimately pays for these higher commissions as demonstrated by the UL policy expenses vs. the 30YT premiums in FIG. 1.

“Other Policy Owner Benefits from Building Your Own Permanent Life Insurance Product

“A policy owner using a lower cost term policy and annuity for cash value growth has several other advantages by unbundling the life insurance protection and cash value vehicles. The first advantage is life insurance optimization. The policy owner can purchase the best available term policy on the market that meets their needs, as well as the best available annuity product. Second, unbundling allows for diversification of carrier and/or product risk by spreading their purchases among several annuities and/or life insurance companies. Finally, unbundling allows for customization. The policy owner can build a portfolio of low-cost term life insurance and annuities that create the blend of premium and benefits, long term guarantees vs. current rates, and credited rate strategies that fit the policy owner’s needs and objectives.

“These advantages exist for the life of the policy. With no transaction cost to exchange term policies and significantly smaller surrender charges on annuities vs. UL products, policy owners have the flexibility to replace older policies for “new and improved” ones. Similarly, policy owner needs change as well as their ability to pay the premiums. By purchasing the term policy separate from the annuity, the policy owner can manage the cash value component of the plan independent of their health situation. Notwithstanding all the advantages of building a customized life insurance plan with term products and annuities, many policy owners still prefer the bundled UL and WL products. The favorable tax treatment granted UL or WL is a significant reason.”

There is additional summary information. Please visit full patent to read further.

Supplementing the background information on this patent, NewsRx reporters also obtained the inventors’ summary information for this patent: “Embodiments disclosed herein are directed to a computer system and method for managing and providing a portfolio of individual term life insurance and annuity policies to create a new overarching life insurance product on the same insured which combines the terms and benefits of all the included products and achieves the tax efficiency of a permanent life insurance product, and a user interface to build and manage changes to the portfolio of policies within the consumer’s tax compliance objectives. This new, overarching life insurance product shall be referred to herein as the “master product.” Methods for determining compliance with federal tax law for life insurance and annuities as described in IRC section 7702 and 7702A are currently applied individual policies. Individual permanent life products are economically bundled versions of term insurance and annuities yet are more costly, more complex, and less flexible to accommodate changes in policy owner’s needs after they purchase the product. Some embodiments include applying rules and congressional intent of IRC section 7702 and 7702A to ensure the master product qualifies as a permanent life insurance product regardless of the type and number of policies within the master product.

“In one embodiment the policy owner establishes a master product that will be able to own one or more individual term life insurance policies, annuity policies, and qualified additional benefit products. The policy owner selects which compliance method will be applied to the master product for compliance with IRC section 7702 and 7702A. The computer system stores the election and applies the selected method in all compliance test calculations.

“In one embodiment one or more policies are purchased from the same or different insurance companies by the policy owner. Such policies may include individual term life insurance, individual annuities, or qualified additional benefits such as disability income. The purchased policies are assigned to the master product, instructions and required data files are sent to the insurance companies administering those policies. The computer system registers the policies and performs compliance calculation tests to determine whether the portfolio of individual policies in the master product comply with IRC section 7702 and 7702A, stores the compliance limits, and manages the compliance process by reporting the definitional limits on premium and cash value, notifying when a compliance test has failed and identifying possible remediation alternatives.

“In one embodiment a policy owner may add to or delete policies from the portfolio at any time. The computer system registers the change in benefits, premiums and/or cash value, performs updated compliance calculation tests to determine whether the portfolio of individual policies in the master product comply with IRC section 7702 and 7702A, stores the new compliance limits, and manages the compliance process by reporting the definitional limits on premium and cash value, notifying when a compliance test has failed and identifying possible remediation alternatives.

“In one embodiment the computer system applies the CVAT method to the master product that is broadly defined to include a portfolio of term life insurance policies, annuities, and/or qualified additional benefit policies. The computer system receives periodic data feeds from the insurance companies administering the individual policies in the portfolio, applies the formulas to that portfolio of policies to process the compliance tests.”

The claims supplied by the inventors are:

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There are additional claims. Please visit full patent to read further.

For the URL and additional information on this patent, see: Clark, Brian J. Systems and methods for building and managing an integrated permanent life insurance product using individual term and annuity policies. U.S. Patent Number 11948206, filed August 18, 2023, and published online on April 2, 2024. Patent URL (for desktop use only): https://ppubs.uspto.gov/pubwebapp/external.html?q=(11948206)&db=USPAT&type=ids

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