Cost of Insurance Increase Announced by Lincoln Financial

Lincoln Financial Group is the latest carrier to announce cost of insurance (COI) increases.  In correspondence to producers today, Lincoln announced COI changes in some Legend Series Universal Life policies issued between 1999 and 2007.  The majority of the changes are increases, but also included some decreases, “reflecting Lincoln’s commitment to acting fairly and responsibly.”  This block of Universal Life policies was originally underwritten by Jefferson Pilot (Lincoln Financial purchased Jefferson Pilot in 2006.)  In making the announcement, Lincoln noted that it is “operating in a challenging and changing environment” and faces “persistently low interest rates, including recent historic lows, volatile markets, and an evolving regulatory landscape.”
Back in May of this year we reported that Lincoln Financial, acting as administrative agent and reinsurer, raised 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.)  (See: Another Major Carrier Raising Cost of Insurance Charges)
Lincoln’s announcement today is the latest in a series of COI increases that started just over a year ago and includes some of the largest, most prominent carriers in the life insurance market; including Transamerica, Voya, Legal & General, and AXA.  The cost increases across these carriers ranged from low single digits to as much as 600 percent.  The increases have dramatically and negatively affected thousands of policies, causing many policy holders to reduce policy death benefits or surrender policies for a fraction of the expected benefit.
Lincoln Financial, like the others it follows, has placed at least a portion of the blame on interest rates. Unfortunately, it does not appear that the historically low interest rate environment is nearing an end. As we mentioned in one of our last blog entries (see: Low Interest Rate Winners and Losers), over 35 percent of all government debt among major countries is trading at negative interest rates.   In fact, in Switzerland, government bonds with a maturity of almost a half century are yielding below zero. (1).
And in the US, the Federal Reserve, which has held the federal-funds rate at 50 basis points or less since the end of 2008, is now realizing that we may have a “new normal.”  A Wall Street Journal article yesterday noted that the “Fed has revised down its estimates of how high the fed-funds rate will go in the long run. Most officials see it reaching 3% or less. Four years ago the consensus was 4% or more.”  While the Fed is expected to boost the federal-funds rate by perhaps a quarter percentage point this year, the article goes on to state that “it isn’t likely to raise them much beyond its next few moves in the months and years ahead.” (2)
The outlook for the next couple of years might just be more of the same, low interest rates and COI increases.  We at ITM TwentyFirst will keep you updated on Lincoln’s announcement as we receive more details related to the policies we manage.
  1. Central Bank Buying Puts Squeeze on Bond Market, Wall Street Journal, July 7, 2016.
  2. Federal Officials Brace for (Familiar) New Normal, Wall Street Journal, August 21, 2016