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Insurance Abstract
An insurance method comprising a return-of-premium (ROP) benefit
is disclosed. The ROP benefit is applied to property and casualty
insurance and related insurance forms. The ROP benefit provides
a return of all premiums after a set period of insurance, less the
amount of any claims made by the insured. The policy may then be
rolled over to again provide a ROP benefit to the policyholder.
Fractional ROP benefit returns may be made on the policy after a
minimum set period less than the full term of the policy. The ROP
benefit may be provided by means of a rider to a standard property
or casualty policy.
Insurance Claims
1. An insurance method, comprising the steps of: (a) calculating
by means of a computer a cost for a return-of-premium benefit on
an insurance product, wherein the insurance product is property
or casualty insurance; (b) establishing a policy contract between
an insurer and an insured wherein the policy contract comprises
the return-of-premium benefit; and (c) if the insured maintains
the policy contract for a full return-of-premium term, calculating
by means of a computer the difference between the total amount of
all premiums paid under the policy contract and the total amount
of all claims paid by the insurer to the insured under the policy
contract, and refunding the difference from the insurer to the insured;
if the insured maintains the policy contract for less than the full
return-of-premium term, but maintains the policy contract for at
least a minimum return-of-premium term, multiplying by means of
a computer the total amount of all premiums paid under the policy
contract by a return-of-premium fraction; calculating by means of
a computer the difference between the fraction and the total amount
of all claims paid by the insurer to the insured under the policy
contract: and refunding the difference from the insurer to the insured;
and if the insured maintains the policy contract for less than the
minimum return-of-premium term, retaining all premiums paid under
the policy contract.
2. (canceled)
3. The insurance method of claim 2, wherein the return-of-premium
fraction increases at an increasing rate as the period during which
the insured maintained the policy contract increases.
4. The insurance method of claim 3, wherein the return-of-premium
fraction increases approximately exponentially as the period during
which the insured maintained the policy contract increases.
5. The insurance method of claim 2, further comprising the step
of calculating the return-of-premium fraction by means of an actuarial
formula.
6. The insurance method of claim 2, further comprising the step
of calculating the return-of-premium fraction by means of an actuarial
table look-up function.
7. The insurance method of claim 1, wherein the step of calculating
the cost of the return-of-premium benefit comprises consideration
of the full return-of-premium term wherein the cost of the return-of-premium
benefit increases as the full return-of-premium term decreases.
8. The insurance method of claim 1, further comprising the step
of recalculating the cost of the return-of-premium benefit in response
to a change in at least one of the premiums paid under the policy
contract and a contract term of the policy contract.
9. The insurance method of claim 1, wherein the step of establishing
a policy contract between an insurer and an insured comprises the
step of adding a return-of-premium rider to an insurance policy.
10. The insurance method of claim 9, wherein the premium comprises
a value equal to a cost of the policy contract and the cost of the
return-of-premium rider.
11. The insurance method of claim 1, further comprising the step
of rolling over the return-of-premium benefit once the full return-of-premium
term is reached.
19. A method for offering an insurance product with a return-of-premium
benefit utilizing a computer, comprising the steps of: (a) computing
a base premium amount for a property and casualty insurance product
based upon one of an input value of an insured property or a computerized
risk assessment for an insured casualty risk; (b) computing a cost
for a return-of-premium benefit utilizing a return-of-premium algorithm,
wherein said return-of-premium computation receives as input the
base premium amount and a return-of-premium term; (c) computing
a total premium amount by adding the base premium amount to the
cost for a return-of-premium benefit; and (d) outputting an insurance
product offering comprising the total premium amount.
20. The method of claim 19, further comprising the steps of: (a)
re-computing the base premium amount in response to a policy change;
(b) recomputing the cost for a return-of-premium benefit utilizing
a return-of-premium algorithm, wherein said return-of-premium algorithm
receives as input the base premium amount, the recomputed base premium
amount, the return-of-premium term, and the fraction of the return-of-premium
term remaining; (c) computing a second total premium amount by adding
the recomputed base premium amount to the recomputed cost for a
return-of-premium benefit; and (d) revised the insurance product
offering to comprise the second total premium amount.
21. The method of claim 20, further comprising the step of computing
and outputting a return-of-premium benefit.
22. The method of claim 21, wherein said step of computing and
outputting a return-of-premium benefit comprises the steps of: (a)
receiving a request to compute a return-of-premium benefit at the
end of the term; (b) calculating a return-of-premium benefit by
subtracting a total amount of all claims paid from a total of all
premiums paid during the term.
23. The method of claim 21, wherein said step of computing and
outputting a return-of-premium benefit comprises the steps of: (a)
receiving a request to compute a return-of-premium benefit during
the term; and (b) calculating a return-of-premium benefit by subtracting
a total amount of all claims paid from the product of a total of
all premiums paid during the term multiplied by a return-of-premium
fraction.
24. The method of claim 23, wherein said return-of-premium fraction
comprises a set of values in the range of 0 to 1 inclusive, each
of the values corresponding to a fraction of the term.
26. The method of claim 23, wherein at least one of the values
of the return-of-premium fraction equals 0.
27. The method of claim 19 wherein the insurance product comprises
one of automobile liability and casualty insurance.
28. The method of claim 19 wherein the insurance product comprises
real property casualty insurance.
Insurance Description
BACKGROUND OF THE INVENTION
[0001] The present invention relates to the insurance field, and
in particular to a return-of-premium insurance system and method
applicable to specific types of insurance.
[0002] Most of the standard insurance policies available today
fall into one of two broad classes. The first class of insurance
is usually referred to within the insurance field as "life
and health," while the second class is referred to as "property
and casualty." The life and health insurance field may include,
but is not limited to, whole life insurance, term life insurance,
fixed- and variable-rate annuities, guaranteed interest policies,
equity indexed annuities, funeral insurance, credit life and disability,
individual and group health, disability income, long-term care,
medical supplements, supplemental benefits, and health maintenance
organizations (HMOs). The property and casualty insurance field
may include, but is not limited to, homeowners insurance, renters
insurance, automotive insurance, directors and officers insurance,
and professional malpractice insurance. These two classes of insurance
are distinct from each other in many ways, and, recognizing these
distinctions, most states require separate licenses for insurance
agents working in these fields. Many states also dedicate separate
divisions within their insurance regulatory departments to regulate
these two different classes of insurance. Although a single agent
can receive licenses in both fields, it is more common for an agent
to specialize in one field or the other, due to the significant
differences between the knowledge and skills necessary to provide
agent services in these distinct fields.
[0003] One way to distinguish between these types of insurance
is to recognize that life and health insurance is generally an optional
form of insurance, but property and casualty insurance may often
be considered required for the policyholder. By optional it is meant
that the decision to purchase this type of insurance, as well as
the details concerning the policy, are within the discretion of
the policyholder, and such policies are sometimes required by a
third party, for example, to fund a buy-and-sell agreement or key-man
insurance. The policyholder purchases life and health insurance
voluntarily, based on a personal decision about a perceived need.
By contrast, a person may often be required to purchase various
forms of property and casualty insurance, and the policy particulars,
or at least the policy coverage minimums, may be set forth as required
parameters. For example, automobile liability insurance is generally
required by state law, which sets forth certain minimum requirements
that the policy must contain by all automobile owners and licensed
drivers. While the policyholder is free to choose more comprehensive
coverage than the minimums mandated by law, he or she must purchase
coverage that at least meets the minimum requirements. Likewise,
homeowners insurance is typically required by lenders for a party
that is seeking a mortgage in order to purchase a home. In this
case as well, the lender will generally provide minimum requirements
for the homeowners insurance that must be purchased by the mortgagor,
although the homeowner may, if desired, exceed those minimum requirements,
or terminate the coverage once the loan is repaid and the mortgage
released.
[0004] The return-of-premium (ROP) concept has been applied by
a few insurance providers within the field of life and health (that
is, optional) insurance. Typically, the insured is given the option
of purchasing a rider to a traditional insurance policy, with the
rider including the ROP benefits. By purchasing the ROP rider, the
customer is guaranteed the return of all insurance premiums paid
provided that the policy is maintained for a set period, less the
amount of any claims made during that period. While the overall
amount of each premium payment is higher, the insured party may
be encouraged to purchase optional insurance when the opportunity
of a full return of all premiums paid is presented.
[0005] By way of example, the ROP rider on term life insurance
may be seen as highly advantageous by the term life customer. Term
life insurance typically has no cash value, and thus at the end
of the term the customer receives no value in return whatsoever.
The only way that a customer receives any return on his or her insurance
premiums is if he or she dies during the insurance term. Whole life
insurance, which in contrast to term life insurance does offer an
investment component, is often disfavored by life insurance purchasers
as too costly and complex. The ROP concept allows life insurance
to be priced more like term insurance, but also offer a savings-like
component similar to whole life insurance. One may consider, for
example, a healthy 40-year-old man who wants a $500,000 death benefit.
A simple term life insurance policy with a 30-year term might cost
$900 per year, while the ROP rider on such a policy might increase
the cost by an additional $350 per year. But this is far less than
the cost of a whole life policy in this amount, which might cost
around $3300 per year. If the insured lives until the end of the
30-year term, he or she would receive a refund of $37,500. To receive
that high of a return by investing in stocks, bonds, or similar
after-tax investments over the same 30-year period, the insured
would need to ensure an average rate of return of about 8%. The
potential advantages of the ROP rider for term life insurance policies
are thus clear.
[0006] While the ROP concept has been successfully applied in the
area of "optional" insurance, that is, life and health
insurance, the inventors are not aware of any application of this
concept within the field of property and casualty, that is, "required"
insurance. One of the critical differences between these forms of
insurance is that while the terms of a required insurance policy
may (and typically do) change over the life of the policy, the terms
of life insurance and similar policies do not change over the policy's
lifetime. One of the primary reasons for purchasing a life insurance
policy at an early date is to secure a set premium and benefit over
a period of years. Any possibility for change in the premium or
benefits would be seen as highly disadvantageous by the insured.
By contrast, property and casualty policies often change their benefits,
premiums, and even whether the insured will be retained under the
policy, based on changing conditions of the insured. For example,
the cost of automobile collision insurance is based partly on the
value of the automobile, which will change when a vehicle is sold
and replaced with a newer vehicle. The cost of automobile liability
insurance is based at least in part upon the past accident history
of the insured, and thus a series of accidents within a period of
time may cause the cost of the insurance to rise significantly.
[0007] Since property and casualty policies may change in a much
more fluid fashion than, for example, life insurance policies, application
of the ROP concept to these policies presents challenges not faced
in the field of life insurance. Specifically, applying the flat-rate
rider fee for ROP riders from term life policies directly onto property
or casualty insurance is not feasible because the variability of
these policies may result in a policyholder paying either far too
much or too little for the ROP benefit. The insured could not be
guaranteed a return of his or her fixed premiums; the return would
instead be a variable amount, and thus the benefit would appear
more like a traditional financial investment in a fluid market.
[0008] Another problem faced in any attempt to apply the ROP concept
in the field of property and casualty insurance is that, unlike
term life policies, property and casualty insurance typically has
a variable premium for a policy where there may never be a claim.
The policyholder holds such policies for an indefinite time. For
example, a policyholder may likely hold homeowners insurance until
the policyholder's house is sold, and may hold automobile liability
insurance until the policyholder buys or sells his or her automobiles.
The date on which these events will occur generally cannot be predicted
in advance, while a life policy has a definite claim event, i.e.,
the death of the insured. As a result, the simple expiration of
the property and casualty policy cannot be used as the gauge of
when a ROP benefit will be paid out if the ROP concept is to be
applied to property and casualty insurance.
[0009] While traditional ROP concepts cannot be directly applied
to insurance in the property and casualty field, the potential benefits
of developing an ROP method for required insurance are significant.
First, the insurer may benefit from an ROP rider for required insurance
because it would encourage policy longevity and stability. The competition
among casualty and property insurance providers has become increasingly
fierce in recent years, and one result of this competition has been
an increase in the ease with which policyholders may switch from
one insurer to another. In addition, policyholders now have access
to an unprecedented amount of information that they may use to compare
the premiums of various insurance providers. As a result of these
factors, policyholders are more likely now to switch insurance providers
in response to even tiny premium increases or slight differences
in premiums charged by competing companies. Frequent switching of
insurers is very costly to the insurance providers, who must expend
significant sums to process the policies of new insureds and close
the files of those who switch to another provider. By instituting
a ROP option for such insurance, the insurer would be providing
an incentive to its policyholders to remain with the insurer even
if a less expensive policy alternative may be available, since if
the insurer switches insurance providers he or she could not take
advantage of the end-of-term ROP benefit. Thus the cost of providing
the insurance would fall overall as the insurer lowers its overhead
costs associated with policyholder mobility. The cost savings of
an ROP benefit could be collected by the insurer, passed on to the
policyholder in order to offer more competitive rates, or split
in such a manner that both the insurer and policyholder reap a cost
savings.
[0010] Another potential benefit of applying the ROP concept to
"required" forms of insurance is that the ROP benefit
will serve as an incentive to the policyholder to limit the frequency
and severity of claims. Under traditional casualty insurance, the
policyholder has little if any incentive to reduce the size of a
claim once the claim exceeds the policyholder's deductible. Consider
for example an automobile damage claim in which some simple bodywork
could be applied to repair an automobile at a cost of $1000, but
complete replacement of damaged body parts would result in a repair
cost of $3000. If the policyholder's deductible is $500, then the
policyholder experiences the same cost regardless of which repair
is chosen. The policyholder will thus likely insist on the full-replacement
repair. If, however, the policyholder held a ROP rider, and thus
knew that the amount of his or her claim might impact his or her
ROP benefit at the end of the policy term, then the policyholder
may be encouraged to authorize the less costly repair option, particularly
for an older vehicle. As a result, the cost of claims may be again
reduced by widespread application of ROP benefits in casualty insurance,
and thus the cost of providing the insurance may decrease. Again,
the insurer may collect the cost savings as additional profit, pass
on these savings to the customer in an effort to offer more competitive
premium rates, or split the cost savings as both profit and reduced
premiums to policyholders.
[0011] In addition to the potential benefits to the insurer as
explained above, which may be passed to the insured in the form
of reduced premiums, an ROP benefit would also offer significant
advantages to the insured. One study indicates that the odds of
a particular insured having an automobile accident that results
in damage greater than the value of the insured automobile is only
1 in 246. Likewise, the odds of a total loss event for a home under
a homeowners insurance policy are only 1 in 1200. Yet millions of
people pay insurance premiums for policies from which they will
never in their lifetimes receive any payment or benefit, simply
because they are required to hold these forms of insurance either
by law or as a result of a lender agreement. By adding an ROP benefit
to the insurance policy, the policyholder turns these odds in his
or her favor, since the policyholder will most likely receive a
full return of the premiums he or she has paid for the insurance.
Under current tax laws in the United States, it is believed by the
inventor that this return will be tax-free, and thus the ROP benefit
should compare well against other low-risk investment opportunities
that are approached with after-tax funds.
[0012] One attempts to achieve some of these benefits with respect
to property and casualty insurance is disclosed in United States
Patent Application Publication Nos. 2003/0135396, 2002/0077866,
and 2002/0077868, each to Javerlhac. In the Javerlhac method, the
policyholder is charged an initial sum set to an amount in excess
of the cost of insurance. This excess is invested by the insurer
to earn income, with reimbursement of a portion of the sum made
after a period less the amount of claims during that period. In
one version of this method, the return to the policyholder is made
at a guaranteed minimum rate. In another aspect of the invention,
the insurer may return the entire initial sum along with earned
income if the policyholder has made no claims. In this way, this
method may encourage the policyholder to limit or forego claims
against the insurer. In still another version, a fraction of the
earnings from the over-cost payment is used to pay a portion of
the policyholder's premiums.
[0013] The Javerlhac method does not offer all of the benefits
of a ROP benefit applied to required forms of insurance. Few policyholders
would have available the significant up-front cash sum required
in order to take advantage of the Javerlhac method. The Javerlhac
method is, in essence, an investment coupled with an up-front insurance
premium payment. The policyholder could achieve many, if not all,
of the same benefits by simply purchasing standard property or casualty
insurance, investing the difference in a relatively secure financial
instrument, and paying all or part of the insurance premiums as
they come due with the proceeds. By contrast, a ROP benefit does
not offer the policyholder any return other than that of the face
amount of premiums paid in. Those premiums are paid over the life
of the policy, and the cost associated with the ROP rider are paid
at the time of each premium payment. Thus the cost of the ROP benefit
is held in check by the limited nature of the benefit. The ROP structure,
however, may offer tax advantages under United States tax laws that
are not available using the Javerlhac method.
[0014] What is desired then is a insurance method applicable to
property and casualty insurance and related insurance forms that
may incorporate a ROP benefit for the policyholder in a desirable
insurance product. This desire is achieved by the present invention
as explained below.
BRIEF SUMMARY OF THE INVENTION
[0015] The present invention is directed to an insurance system
and method for application in the fields of property and casualty
insurance and related insurance that provides a ROP benefit to the
insured. The insured may receive the ROP benefit through a rider
on a traditional insurance policy. This rider will guarantee the
return of the premium paid at the end of an agreed number of years,
less the amount of any claims paid.
[0016] Because this class of insurance often require changes to
policies over time, and because premiums may rise or fall over time,
the cost of the ROP benefit in the present invention varies over
time as well, being tied to the amount of the underlying insurance
premium. This variable ROP benefit cost thus overcomes the limitation
of life-insurance ROP approaches that use a static ROP cost structure.
In addition, since such insurance has an unknown claim event and
flexible premiums that may continue indefinitely, the present invention
may involve the use of roll-over terms in which the ROP benefit
is applied. At the end of each term, the full ROP benefit is available,
and a new ROP benefit term begins. Lesser amounts may be paid as
a percentage of premium returned if the policy is cancelled in less
than the agreed term, beginning at a certain minimum period short
of the agreed full term.
[0017] The ROP benefit for this class of insurance offers several
benefits to both the insured and insurer. The ROP benefit allows
the insured an opportunity to recover the amount of premiums paid
for required forms of insurance, where previously an insured could
not recover any amount of the premiums paid other than through a
claim. Further, the ROP benefit is advantageous to the insurer since
it encourages insureds to remain with the insurer even where a competitor
might offer a less expensive premium for comparable coverage. Also,
the ROP benefit works to the insurer's advantage because it encourages
the insured to cooperate in reducing the amount of claims, thereby
lowering the cost of insurance overall and thus making the insured's
policies more competitive using cost-based pricing. Finally, the
insured's ROP benefit at the end of the term is believed to be tax
free under federal and state law. Thus the ROP benefit compares
favorably to an alternative, relatively secure financial investment
since the insured's return is measured in after-tax dollars.
[0018] It is therefore an object of the present invention to provide
for an ROP benefit in an insurance method for property, casualty,
and other types of required insurance.
[0019] It is a further object of the present invention to provide
for an ROP benefit in an insurance method with a cost that varies
in proportion with the underlying insurance premium.
[0020] It is also an object of the present invention to provide
for an ROP benefit in an insurance method that will discourage insureds
from switching between policies in response to relatively small
premium differences.
[0021] It is also an object of the present invention to provide
for an ROP benefit in an insurance method where a fraction of the
premium may be returned after a minimum period of the ROP term,
but before the full term has been completed.
[0022] These and other features, objects and advantages of the
present invention will become better understood from a consideration
of the following detailed description of the preferred embodiments
and appended claims in conjunction with the drawings as described
following:
BRIEF DESCRIPTION OF THE SEVERAL VIEWS OF THE DRAWINGS
[0023] FIG. 1 is a table illustrating possible return of premium
(ROP) benefits after various periods of time have elapsed according
to a preferred embodiment of the present invention.
[0024] FIG. 2 is a flow chart illustrating the steps in a preferred
embodiment of the present invention.
DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENTS
[0025] The return of premium (ROP) insurance method is applied
according to the preferred embodiment with respect to property and
casualty insurance, and related forms of insurance, including insurance
that governments or lenders typically require persons to maintain
under certain circumstances, and such insurance for which the term
is potentially indefinite and the terms of the policy may change
over time. In the preferred embodiment, the customer is offered
the ROP benefit as a rider to a standard insurance policy. The customer
would pay a premium that reflects the cost of the insurance itself
plus the value of the ROP benefit. The customer would thus pay a
single premium, even though the ROP benefit is offered by the insurer
as an add-on option. In alternative embodiments, a policy could
be presented that integrates the ROP benefit. In other alternative
embodiments, the ROP benefit could be billed to the insured separately
from the cost of the standard insurance policy, although it is believed
this option would be less attractive to the insured. The cost of
the ROP benefit and some variations in policy coverage may be calculated
according to actuarial methods, based on the criteria discussed
herein.
[0026] In the preferred embodiment, the ROP benefit is paid out
after the insured has maintained the policy for a defined period.
(This period will sometimes be referred to herein as the "full
term" of the policy, even though the underlying policies typically
have indefinite terms.) The cost of the ROP benefit preferably reflects
the length of this defined period or term, with the cost of the
ROP benefit being lower for longer terms. This relationship of cost
to period reflects both the reduced cost for the ROP benefit to
the insurer when the rider is maintained over a longer period of
time, as a result of the time value of money, as well as the greater
overhead reduction from holding the insured in a policy for a longer
term, and thereby further reducing turnover among policyholders.
[0027] Also in the preferred embodiment, the insured may choose
to terminate the policy after a certain minimum period or term for
a return of a fraction of the full ROP benefit. Typically, the policy
would provide a certain period of time before which no ROP benefit
would be paid if the policy is terminated. This is to ensure a certain
minimum level of loyalty to the insurer in order for any ROP benefit
to be received. After this minimum period of time, the insured would
be entitled to a fraction of the ROP benefit, up until the full
term at which the complete premium payment is returned. The fractional
ROP benefit would increase as the period that the insured actually
held his or her policy increased beyond this minimum term. Preferably,
this increase would be exponential or approximately exponential
in form, so as to provide further incentive to maintain the policy
as the insured more closely approaches the end of the full ROP benefit
term.
[0028] Referring now to the table of FIG. 1, a representative sample
of fractional ROP benefits is provided according to a preferred
embodiment of the present invention. The left-most column of FIG.
1 represents the number of years that have passed since the policy
was instituted. The second, third, and fourth columns represent
ROP benefit fractions for a 15-year, 20-year, and 30-year term of
full ROP benefit, respectively. For example, it may be seen that
for a policy including an ROP rider that pays the full ROP benefit
(that is, a complete return of the premiums paid) after the twentieth
year in which the policy is in force, there is no return if the
policy is terminated within the first 5 years, and a return of 3%
of all premiums paid to date if the policy is terminated after the
sixth year in which it is in force. It may be seen that the returns
increase at a roughly exponential rate as the full ROP benefit date
is approached, further encouraging the insured to maintain the insurance
in place and thereby provide stability, and lower processing costs,
for the insurer.
[0029] It may be seen that the examples provided in the table of
FIG. 1 relate to the situation of a fixed premium over a specific
number of years. In this scenario, the insurer collects the same
amount of money each year in the form of premiums. Since the insurer
knows before the ROP rider is implemented how much money will be
collected over a pre-determined number of years to pay for the insurance
and the ROP benefit, an actuary acting on behalf of the insurer
may calculate the appropriate cost of an ROP rider in order to provide
the expected ROP benefit and to ensure an appropriate profit for
the insurer. This calculation must include a consideration of the
fact that a certain percentage of insureds will not reach the minimum
period during which any fractional ROP benefit will be paid, and
another percentage of insureds will not maintain their insurance
policy and ROP rider long enough to receive the full ROP benefit.
The calculation may, however, use a fixed fractional ROP benefit
chart as shown in FIG. 1. In the preferred embodiment of the invention,
however, it is considered that the underlying insurance policy may
change over time, such that the premium paid for the insurance may
be variable during the life of the ROP rider. Whenever such a change
occurs, actuarial calculations must be performed in order to determine
an appropriate change in the ROP rider premium, to insure that the
payments received by the insurer remain sufficient to cover the
full ROP benefit payment at the conclusion of the ROP term, if necessary,
and ensure an appropriate profit for the insurer on the ROP rider.
Likewise, an adjustment may be required in the fractional benefits
pay-out table, as shown by example in FIG. 1, in order to ensure
that the insurer is protected from a loss event. This re-calculation
may be performed multiple times during the life of the ROP benefit
if the premium paid the insurer on the underlying policy continues
to change.
[0030] With reference now to FIG. 2, the preferred embodiment of
a method according to the present invention may now be described.
At block 10, the customer purchases a ROP rider to a standard property
or casualty insurance policy in response to an offer from an insurance
agent. Although the term of the underlying property or casualty
insurance is indefinite, the ROP rider includes a set term at which
the full ROP benefit, that is, the full return of all premiums paid,
will be refunded to the insured. Also associated with the ROP rider
is a minimum term for which the policy must be maintained in order
to receive any fraction of the ROP benefit, as well as a formula
or table (similar to that shown in FIG. 1) by which the fractional
ROP benefit may be calculated if the policy is held between the
minimum term and the full term. The insured then holds the policy
and ROP rider for a period of time, paying periodic premiums that
reflect the combined cost of the insurance itself and the ROP rider.
It may be noted that the premiums for such insurance may change
over time, and the cost of the ROP will change correspondingly such
that the full premium amounts paid at the end of the term may be
repaid with an equal return to the insurer on the ROP rider. The
cost of the ROP rider may be calculated actuarially, and changes
in the ROP rider cost will move in accordance with changes in the
underlying policy premium. For example, if the premium increases
on a particular policy, then the cost of the ROP rider must increase
as well, since additional funds will be necessary to ensure return
of all premiums paid at the end of the full term. The length of
time from the premium increase to the end of the full term is also
a factor in the actuarial calculations to be performed in setting
the new ROP rider cost. Such calculations may be performed by an
actuary using a personal computer or the like loaded with appropriate
software as is known in the art.
[0031] The ROP benefit must be calculated whenever either the insured
cancels the policy or the full ROP benefit term is reached. At decision
block 12, the method inquires whether the policy has in fact been
held for the full term. As illustrated in FIG. 1, a full term might
be, by way of example, fifteen, twenty, or thirty years. Any period
of time that is a multiple of the premium payment period may alternatively
be employed as a full term, with the cost of the ROP benefit being
inversely proportional to the length of such period. If at decision
block 12 the answer is "yes," then processing moves to
block 20. This represents the condition of a full ROP benefit being
returned to the insured.
[0032] At processing block 20, the amount of any claims that have
been made during the policy term are subtracted from the full amount
of all premiums paid during the term. At decision block 24, it is
inquired whether the resulting difference from block 20 is greater
than zero. If the answer to this question is "no," then
the insured receives no ROP benefit at block 33 and processing continues
to decision block 28 (described below). The insured has, in effect,
already received his or her return of premium by means of the insurer's
payment of claims made during the policy term. The amount by which
the insured's claims exceed the full ROP benefit, if any, is irrelevant
for this calculation, so long as the claims do in fact meet or exceed
the full ROP benefit as determined at decision block 24. If the
answer to this question is "yes," then processing moves
to block 30, where the insurer pays to the insured the difference
calculated at block 20. Processing then moves to decision block
28.
[0033] At decision block 28, the method inquires whether the insured
wishes to "roll over" the ROP benefit, that is, continue
paying an additional premium amount such that full premiums will
be returned after a subsequent ROP benefit term is elapsed. The
full term of this subsequent ROP benefit need not be the same as
the full term of the recently lapsed ROP benefit. In an alternative
embodiment, the insurer can automatically "roll over"
the ROP benefit unless the customer requests a change in policy
conditions. In either case, if the customer answers "no"
at decision block 28, then processing ends at terminal block 34.
If the customer answers "yes" at decision block 28, then
processing returns to block 10 where the additional ROP rider is
purchased and held for all or some portion of the subsequent term.
[0034] If the answer at decision block 12 is "no," that
is, if the customer has not reached the full ROP benefit term and
the policy is thus being terminated early, then processing continues
to decision block 14. At decision block 14, it is inquired whether
the insured has held the policy for the minimum term in order to
receive a fractional ROP benefit. In the preferred embodiment as
illustrated by the table of FIG. 1, the insured must hold a policy
for a minimum of five years before any benefit is received, although
this minimum may be any period that is a multiple of the periods
at which premiums are paid. If the answer at decision block 14 is
"no," that is, if the person has not held the policy long
enough even to receive a fractional ROP benefit, then block 16 is
received at which the insured receives no return and the policy
terminates at terminal block 34. If the answer at decision block
14 is "yes," then the insured has held the policy long
enough to receive a fractional ROP benefit, but has not held the
policy long enough to receive the full return of all premiums paid.
Processing continues then at block 18.
[0035] At block 18, the fractional ROP benefit to which the insured
may be entitled is calculated. This calculation may be, for example,
based on a formula, or based on a table as illustrated in FIG. 1.
Typically this step, as well as some or all of the other steps of
the method, would be performed by a personal computer or the like
as part of an automated policy cancellation processing routine implemented
in software developed for this purpose. Using the fractional ROP
benefit calculated at block 18, block 22 subtracts from this amount
the total amount of any claims made by the insured during the policy
term. At decision block 26, it is inquired whether the resulting
difference from block 22 is greater than zero. If the answer to
this question is "no," then the insured receives no ROP
benefit at block 16, the policy is cancelled, and processing ends
at termination block 34. If the answer to this question is "yes,"
then processing moves to block 32, where the insurer pays to the
insured the difference calculated at block 22. The policy is then
cancelled, and processing ends at termination block 34.
[0036] It may be noted that while in the example of FIG. 2 it is
assumed that the policyholder purchases the ROP rider at the time
that a new policy is instituted, the present invention is not so
limited. The policyholder in fact has the option of discontinuing
the ROP at any time, instituting a new ROP rider after the cancellation
of a previous ROP rider, or starting the ROP rider at any time after
the underlying policy has come into force. If the policyholder adds
the ROP rider to a policy that is already in existence, then the
ROP benefit on the existing policy starts to accrue when the ROP
rider comes into effect. If the policyholder cancels the ROP rider
at any time for any reason, the policyholder receives a partial
refund of premiums if the ROP has been in existence for the requisite
period of time.
[0037] As an illustrative example of the above circumstances, suppose
that a policyholder has an ROP rider with a twenty-year term that
has been in force for five years, and then has an insurance claim
in the amount of $5,000. Further suppose that the total annual premiums
that have been paid are in the amount of $1,000 per year. The policyholder
then has the option of continuing the ROP for the next fifteen years,
in which case if there are no further claims the insured will receive
an ROP benefit of $15,000. The policyholder may also choose, however,
to discontinue the ROP rider and be issued a new twenty-year ROP
rider. If there are no further claims, then the policyholder will
receive $20,000 at the end of the new ROP rider period.
[0038] As another illustrative example, suppose that a policyholder
paid $1,000 per year in premiums on a policy with a twenty-year
ROP rider, then experiences a claim in the amount of $30,000. The
policyholder could discontinue the ROP rider at that point, since
no benefit can accrue as the claim has now exceeded the potential
ROP benefit. The policyholder may, however, start a new ROP rider
for the continuing policy. The cash value for this new ROP rider
would begin again, with no cash value being realized until, for
example, the sixth year following the start of the new ROP rider,
assuming a benefit structure as shown in FIG. 1.
[0039] The present invention has been described with reference
to certain preferred and alternative embodiments that are intended
to be exemplary only and not limiting to the full scope of the present
invention as set forth in the appended claims. |