Life Insurance Sales

At some point, Carrier A is going to have to go back to the drawing boards. And indeed, based on new data and in anticipation of longer life expectancies, Magnum Opus UL is born. Carrier A stops selling Opus (technically “closing the block” of policies it has sold) and begins touting Magnum Opus in many of the same ways it introduced its predecessor. In all likelihood, agents are going to encourage the eligible Opus policyholders to make the switch to Magnum Opus. Many do, and almost everyone’s happy.

However, we’ve just described the initial stages of adverse selection. Earlier in this book, readers saw an example of adverse selection in the discussion of why term insurance doesn’t work at older ages-only people about to die would continue to pay term’s huge renewal premiums and insurance companies would go bankrupt if their policyholders had that kind of economic control. The transition from Opus to Magnum Opus is another example of adverse selection. By drawing out the best risks from the pool of Opus UL policyholders, a less healthy group remains. The smaller, less healthy group will likely experience earlier deaths, driving up the claims experience of Carrier A and forcing it to raise its mortality charges even more. Even as those lucky enough to qualify for the newer policy enjoy prospectively lower mortality charges, the group remaining in Opus will likely incur higher costs.

The important question to ask: What will happen 3-5 years from now when Magnum Opus UL is in turn succeeded by Magnum Opus ULTRA UL in the ever spiraling competition of policy sales? It’s quite likely that the much touted Magnum Opus policyholders will be split into those who can qualify to “upgrade” and those who can’t. For those who can, it’s important to also appreciate that successfully qualifying to go from one policy to another-chasing the illustrated appearance of best price-also has the immediate cost of surrender charges on the old policy, new sales commissions, and yet more surrender charges to be imposed if there’s yet another round of replacements in the future.