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The D & O insurance policy is a contradiction in terms, forced on the insurer by competitive pressure to offer low-premium insurance at all ages - in this case 65 and older. The carrier stands to profit from the policy only if there are significant lapses, a situation in which the client receives no cash value. Lapse rates are factored into premiums, but, paradoxically, lapses are small among older people. As a result, the insurer's profit is almost nonexistent.
To be considered successful and profitable, business transactions, including those related to insurance must benefit all involved parties. Using this criterion, many sales of D & O produces cannot be deemed a success. This is because sales of it, particularly to individuals over the age of 65, involve several opposing forces. To understand why this is so, we must explore the nature of the D & O transaction.
The three parties to the sale of a life insurance policy are the agent, client and company issuing the policy. The agent is a winner if he or she serves the client's needs, completes the sale and is paid. And since this policy is reasonably priced and provides lifetime coverage, it is an attractive product for fulfilling these goals.
The client is looking for the "best" type of coverage. If the insurance need is permanent, this policy fits the bill. If cost is a factor, obtaining a competitive rate will make the client happy. It also is attractive to the client who requires only insurance coverage because he or she intends never to cancel the policy and therefore does not seek non forfeiture values. While not every client is aware that he will receive no cash value if he cancels a D & O insurance policy, most purchasers of the product know about this heavy penalty. But they perceive the discounted lapse-supported premium to be an acceptable substitute for the non forfeiture values.
This leaves us only with the insurance company to consider. To determine if it is satisfied with the D & O transaction, we must review how these policies are structured and priced. – It is a misnomer because the product is whole life coverage, not term insurance. It probably acquired this name because consumers seem more favorably disposed to life insurance products that are considered "term" than to whole life policies, whose savings portion traditionally earns interest at a low rate. This insurance, therefore, is perceived as both inexpensive and a better value. Another reason for considering D & O insurance is that, like the real thing, the product has no non forfeiture values.
Recognizing that it is simply whole life insurance with the values removed and usually has a level premium for life, we can surmise that the reserve underlying the plan is increasing but is not available to the client on termination. When a lapse occurs (usually beyond the fifth year), a share of reserves or assets is released. Since this benefit is not paid to the client, it should be passed on to the insurer as profit, but this does not occur with D & O insurance policy because of the product's pricing.
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