In our last Blog post, we recapped the year in Trust Owned Life Insurance (TOLI) for 2015 (see: The Year in TOLI – 2015 Edition). As one of the pioneers of life insurance policy management in the United States, ITM TwentyFirst has the unique ability to participate in and track trends in the TOLI industry. Almost a decade ago, we surveyed our TOLI portfolio. In 2015, we updated that survey and the results clearly reveal changes – many of which will lead to additional challenges for those of us who manage life insurance policies.
One of the highlights for us here at ITM TwentyFirst was the June 1 merger of Insurance IQ, Insurance Trust Monitor (ITM), and TwentyFirst (See Merger of Leading Life Insurance Service Firms) to create ITM TwentyFirst. Synergy is a term thrown around easily when firms join forces, but in this case, it is true. The three firms have blended seamlessly to create the nation’s pre-eminent life insurance policy management firm.
We have written, as recently as June of this year, in Life Insurance Illustration Assumptions…a Trustee’s Dilemma, about the investment assumptions used in life insurance sales illustrations. In most illustrations, all else equal, the higher the return assumed in the investment backing the cash value, the lower the premium shown to carry the policy. Historically, this has led to aggressive sales presentations that illustrate well, but ultimately do not hold up. In the last few years we have published a number of Blogs referencing Indexed Universal Life (IUL) policies sold with what we believed were aggressive assumptions. It appears that that will be ending. As of today, Actuarial Guideline XLIX (AG 49) will limit the crediting rate shown on all “new business and inforce life insurance policies” where “interest credits are linked to an external index or indices.”
In the early ‘80s when interest rates skyrocketed (Are you old enough to remember 18% mortgage rates?) the insurance industry created Universal Life insurance (UL), with sales illustrations based on “current assumptions,” which included the fixed rate being credited to the policy’s cash value at the time of the policy’s issue. As with all sales illustrations, the historically high “current” assumptions were projected over the life of the insured, creating a rosy scenario that was easy to sell. The higher the interest rate credited, the lower the premium needed to sustain the policy. Unfortunately, as can be seen by the chart to the right, which shows the actual crediting rate of a top UL carrier, those rates did not hold. The rosy scenario promised turned into a thorny reality as policy cash values plummeted and policies lapsed. In the mid to late ‘90s when a monkey with darts could rack up double-digit returns in the equity markets, many agents were selling Variable Life contracts tied to the equity markets with 12% annual return assumptions. How did that work out? Same outcome: crashing cash values and lapsing policies. Even venerable old Whole Life has seen a steady downturn in dividend rates over the last twenty years, with forecasted “vanishing premium” scenarios that led to vanishing policies and lawsuits. Point being, a sales illustration is just a projection, and your job as a trustee is to determine whether that projection will come true.
As we end 2014 I wanted to post some observations from the past year.
In a past blog entry entitled, What You (as Trustee) Need to Know About Equity Indexed Universal Life, I wrote about this popular life insurance product, Indexed Universal Life. One of the problems I spoke about was the sales practices of the agents (and carriers) providing the product. In the blog entry, I mentioned that some carriers and agents assume crediting rates in the policy that “exceed 8%, which many feel is rather aggressive.”
In my last entry, What You (as Trustee) Need to Know About Equity Indexed Universal Life, I spoke about one of today’s hot insurance products.
Lately, ITM has seen an upsurge in the use of Equity Indexed Universal Life (EIUL) policies. Agents are touting the product’s “upside potential” with sales illustrations projecting higher rates of return than Current Assumption Universal Life (CAUL) products. These agents also highlight the “downside protection” that makes the product attractive to those fleeing the volatility of Variable Universal Life (VUL) policies. Once again, the insurance industry has seemingly come up with the perfect vehicle for the times.