The cost of insurance (COI) increases of the last 18 months have wrecked estate plans and created financial hardship among policy owners. The negative effect is clear – some policy carrying costs have more than doubled (see:Transamerica Cost Increase Causes Premium to Maturity to More Than Double: A Case Study for Trustees). What is not so clear – who is to blame?
A recent US Tax Court Memo identifies the financial risk in unwittingly or intentionally mismanaging a life insurance policy. In 1987, a policy owner purchased a single premium variable life policy (since this was pre Code Section 7702A, it was not considered a modified endowment contract) with a payment of $87,500. The policy contract permitted the owner to take loans from the policy, allowing any unpaid loans and interest that accrued to be added to the “policy debt.” Once the policy debt exceeded the cash value of the policy, the carrier could terminate the policy after giving the policy owner notice and the opportunity to pay down the policy debt to avoid termination.
In the past year, we have posted blogs about things we have rarely, if ever, seen before. Cost of insurance (COI) increases — they didn’t seem possible. Negative interest rates — never heard of them.
Lincoln Financial Group announced that Lincoln Life & Annuity Company of New York, acting as administrative agent and reinsurer, will be raising the COI rates on a specific block of universal life and variable universal life policies issued by Aetna Life Insurance and Annuity Company (now Voya Retirement Insurance and Annuity Company.)
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.
Our last blog entry asked the question, Will the Universal Life Price Increases Spread? Shortly thereafter, AXA announced that they were increasing the cost of insurance (COI) on a limited number of Athena Universal Life II policies, effective with the first monthly deduction on or after January 1, 2016.
Our firm manages life insurance for TOLI trustees and institutional investors, and I have heard a concern from both parties about the recent Current Assumption Universal Life (CAUL) cost increases. People are worried about the direction of in force policy pricing. Are the increases an aberration or will they spread? I am not a soothsayer, nor am I on the boards of any of the carriers that have increased costs or are contemplating a raise, but I do have some insight into the matter because of our role in the policy management industry.
About a month ago, we wrote about the Universal Life cost increase occurring at Transamerica and Legal & General (Notice to TOLI Trustees: Universal Life Costs ARE on the Rise). Since then, AXA has announced cost of insurance increases beginning on the next anniversary date of some of its US Financial Life policies.
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.”
Over the past few years, I have written about carrier challenges in this historically low interest rate environment. In August 2013, in If the Cost of Insurance Goes This High, You Are Guaranteed to Have Some Angry Clients, I referenced an email from a carrier representative, who said that the “actuarial (department) is currently doing an expense, mortality and interest study” and that “by the end of 2013, the cost of insurance (COI) is anticipated to increase up to the guaranteed maximums.” While that did not happen, the next month I highlighted, in What I Had Feared Was Coming May Already Be Here, a 2012 article that mentioned that life insurance executives were looking to increase the cost of insurance in their policies to increase profits. That has now happened. In the past few weeks, two carriers, Transamerica and Legal & General America, have announced that costs are indeed going up on some of their Universal Life policies.