Notice to TOLI Trustees: Universal Life Costs ARE on the Rise

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.

Transamerica announced specified cost increases in letters to policyholders that went out last month. As you may be aware, Universal Life policy costs normally go up annually as the insured ages. The first policy I reviewed had a “normal” 12% monthly deduction jump last year. However, with this new increase, Transamerica projects the policy costs will jump over 33%, a hefty bump.

According to Transamerica, costs were raised “to address our expectations as to the future costs of providing this coverage.” It noted that the “monthly deductions would still be below the maximum rate allowed” by policy contract, but the “increase could be significant.” The Transamerica letters provided options for the policy owner: surrendering the policy, reducing the face amount, or keeping the face amount at the current level and paying “additional premiums in order to keep the policy in force.”

Legal & General America announced cost increases starting in August on some of its Banner and William Penn Universal Life policies. In official correspondence, the carrier noted unfavorable “experience factors (mortality, persistency, investment income, and expenses)” and said, “When the cost of insurance rates were originally set, the company had certain expectations for the number and timing of death claims; how long people would keep their policies; how well the company’s investments would perform; and the cost to administer policies. Based on our review of the company’s recent experience, the company has revised future expectations for the experience factors.”

Legal & General America had already raised rates on some products back in 2012, citing experts who described “the current interest rate environment as the most challenging they’ve ever faced, and the future interest rate environment as the most uncertain.” Three years later, no improvement. This will probably not be the end, either. In fact, other life insurance plans are being reviewed and we expect other cost increases later this year.

The ITM|TwentyFirst Remediation and Policy Management Departments are gathering in-force ledgers and reviewing the “numbers” and I hope to follow up with more information on the effect of these price increases on policies we manage.

Bottom line: Managing in-force life insurance has just gotten more challenging.