Second Amended Complaint Filed In The Brach Family Foundation Lawsuit Against AXA For Cost Of Insurance Increase

Late last week, a Second Amended Class Action Lawsuit was filed in the United District Court, Southern District of New York in the Brach Family Foundation vs. AXA Equitable Life Insurance Company case we first wrote about on February 2, 2016.

The 35-page document expands and adds to the original 18-page Class Action Complaint filed February 1 of last year, and follows on the heels of two unrelated lawsuits filed against AXA last week.

The suit, brought on behalf of the foundation and “similarly situated owners” of Athena Universal Life II policies subjected to the COI increase, alleges the increase was “unlawful and excessive” and that AXA violated “the plain terms” of the policy and “made numerous, material misrepresentations in violation of New York Insurance Law Section 4226.”

The rate hikes, which were applied in March of last year, were targeted to a group of approximately 1,700 policies issued to insureds with an issue age of 70 and up, and with a policy face amount of $1 million and up.  Since the increase was focused on this “subset”, the suit alleges that the increase was unlawful because the policies require that if a change in rates occurs it must be “on a basis that is equitable to all policyholders of a given class.”   The suit points out that there is no “actuarially sound basis” to treat policyholders differently simply because one may be 69 and one 70 at issue age, or because one may have a policy with a face amount above or below $1 million. The suit also points to actuarial studies that indicate there are actually “lower mortality rates for large face policies.”

The suit notes that there are six “reasonable assumptions” that COI changes can be based on: expenses, mortality, policy and contract claims, taxes, investment income, and lapses. AXA has stated that the COI increase was based on two of those: investment experience and mortality.

In order for the increase to be “based on reasonable assumptions” for investment income, the increase has to “correspond to the actual changes in investment income observed,” according to the lawsuit, which points out that “since 2004, there has been no discernible pattern of changes in AXA’s publicly reported investment income” that would “justify” any type of COI increase.

AXA defended its increase, in part, by stating that insureds in these policies were dying sooner than projected. However, the lawsuit claims that “mortality rates have improved steadily each year” since the policies were issued.   According to the lawsuit, the Society of Actuaries has performed surveys comparing observed mortality of large life insurance carriers to published mortality tables and has found that the “surveys have consistently showed mortality improvements over the last three decades, particularly for ages 70-90.”  The suit points out that AXA informed regulators in public filings as late as February 2015 that it “had not in fact observed any negative change in its mortality experience,” and answered no when asked if “anticipated experience factors underlying any nonguaranteed elements [are] different from current experience.”  When questioned whether there may be “substantial probability” that the illustrations used for sales and inforce purposes could not be “supported by currently anticipated experience,” the carrier again answered no.

The suit alleges that if AXA’s “justifications” for the COI hikes are valid, “then AXA applied unreasonably extreme and aggressive haircuts to the 75-80 mortality table when setting original pricing of AUL II, and these pricing assumptions were designed to make AXA’s product look substantially cheaper than competitors’ and gain market share” and by doing so, AXA engaged in a “bait and switch” which resulted in “materially misleading illustrations, including all sales illustrations at issuance” in violation of New York Insurance Law Section 4226(a).

By focusing the increase on older aged insureds, the suit alleges AXA “unfairly targets the elderly who are out of options for replacing their insurance contracts” and forces the policyholders to either pay “exorbitant premiums that AXA knows would no longer justify the ultimate death benefits” or reduce the death benefit, lapse or surrender the policies.  According to the lawsuit, any of these actions will allow AXA to make a “huge” profit from the “extraordinary” COI increase.  According to the lawsuit, AXA originally projected that the COI increases, which ITM TwentyFirst has noted ranged from 25-72%, would increase “profits by approximately $500 million.” The lawsuit also notes that in its latest SEC filing, the carrier said that “the COI increase will be larger than the increase it previously had anticipated, resulting in a $46 million increase to its net earnings,” which the suit points out is “in addition to the profits that management had initially assumed for the COI increase.”

For a copy of the Second Amended Class Action Lawsuit in the case, contact mbrohawn@itm21st.com

Cost of Insurance Finger Pointing: Who Is To Blame?

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?

No less than five lawsuits alleging foul play are currently filed against life insurance carriers.  AXA, which increased costs on 1,700 specified Athena II policies (see: Lawsuit Filed Against AXA for Athena Life II Cost of Insurance Increase) is accused of subjecting policy owners to “an unlawful and excessive cost of insurance increase,” in a lawsuit filed in February of this year. According to the suit, while AXA insisted “affected insureds are dying sooner than … anticipated .… mortality trends for the affected insureds have continued to improve substantially since the time the policies were issued” (1).

Transamerica, in a suit spearheaded by Consumer Watchdog, is accused of an “unconscionable business practice” that is hurting “elderly Policyholders who have dutifully paid premiums for 20 years or more” (2).  A number of articles in The Wall Street Journal and The New York Times have highlighted the hardship of higher costs, especially for older policy owners.  The suit accused Transamerica of breaching the contract terms “in order to avoid its obligation to credit the guaranteed interest rates under the policies.”  Since the carrier’s investment returns are insufficient to support the policies’ guaranteed 5.5% rate, the suit says “they are attempting to offset the guarantee through higher monthly deductions taken from the policyholders’ accumulation accounts.”

Transamerica is also receiving unwanted attention for its use of so called “shadow insurance,” a practice that moves liabilities from regulated companies that market life insurance to shadow reinsurers, which tend to be less regulated, creating “unrated off-balance-sheet entities within the same insurance group” (3). The practice was noted in the Consumer Watchdog suit and linked to both dividend upstreaming and the COI increases.  That suit notes that in 2010, “Transamerica reported that it had taken reserve credits as a result of reinsurance transactions with affiliated reinsurance companies totaling approximately $30 billion, based on representations that Transamerica had made ample provision to cover the liabilities relating to those policies, including the future COI associated with its universal life policies.”  During that same year they “up-streamed dividends to their ultimate parent holding company, AEGON NV, totaling $2.3 billion.”  The suit infers that the practice left the carrier financially vulnerable and led to the cost increases.

Joseph Belth, professor emeritus of insurance at Indiana University and a well-known industry icon, calls shadow insurance a “shell game” and warns the “industry is headed for serious trouble” (4).  He has brought suit against the state of Iowa to release information on the practice and also tied it into the COI increase, alleging that it “left a hole in Transamerica finances, resulting in its call for substantial life insurance premium increases” (5).

As a response, the carriers have pushed back. An AXA representative declared that the lawsuit against AXA “had no merit.” It is their belief that in their “effort to prudently manage” their policies, a “change was necessary because they expected future mortality and investment experience to be far less favorable than anticipated” (6).

There is no doubt that carrier investment experience has been hampered by the historically low interest environment which has affected their decisions. Most insurance carrier investments are centered on fixed investments, and part of their profits depend on the spread between what they earn and what they credit to the policies. Since the market correction of 2007-08, fixed rates have been squashed by central banks and governments worldwide. As an outcome, the investment spreads the carriers expect have shrunk, and in some cases, disappeared.  Perhaps that is another place to affix blame. While many believe that the low rates were necessary to guide the world economy to safer ground, there is an increasing call for a return to more normal rates, whatever that might be. An increase in interest rates would certainly be more beneficial to insurance companies, but not governments.  As we have noted (see: Low Interest Rate Winners and Losers), it was recently reported that between 2007 and 2012, “governments in the United States, the United Kingdom, and the Eurozone had collectively benefited by $1.6 trillion” because of low borrowing rates.  With 35% of all government borrowing at negative interest rates (7), and borrowing increasing yearly, there is little government incentive to increase rates. In the US, government debt as a percentage of gross domestic product has doubled in the last 9 years, yet net payments on the debt have declined. Without an increase in fixed rates, the stress on carriers will only grow. In the US and in Europe, increasing regulation and reserve requirements have placed additional pressure on the carriers while the governments are assisting in maintaining, what many economists believe, artificially low rates.

While the finger pointing has focused on the carriers and those who have kept interest rates low, we expect that the sights will soon turn to those who manage the policies: the Trust Owned Life Insurance (TOLI) trustees who may or may not have adequately informed grantors, and beneficiaries.  Life insurance is an asset affected dramatically by market changes and must be managed with those forces in mind.

Regardless of who or what is responsible for the increased cost of insurance charges, the impact on many policy owners has been severe. We see many policy owners and trustees looking for advice on what to do with policies impacted by the increases. In some cases, parties have determined they no longer want the insurance.  On November 1st we will be providing a free webinar entitled, What To Do With An Unwanted Life Insurance Policy. The session will provide one hour of free CE for CFP, CTFA and FIRMA members and will features real life case studies, including one centered around an actual cost of insurance increase case we reviewed.  To register for the course, simply click here.https://www.itm21st.com/Education

 

  1. Brach Family Foundation v. AXA Equitable, U.S. District Court, Southern District of New York, Case No. 1:16-cv-740.)
  2. Feller et al v. Transamerica Life Insurance Company, United States District Court, Central District of California (Case 2:16-cv-01378)
  3. Minneapolis Fed Research, Shadow Insurance, Staff Report 505, Revised May 2016.
  4. Iowa in Middle of Debate Over ‘Shadow Insurance’ Deals, Insurance Journal, August 31, 2016.
  5. Joseph M Belth v. Iowa Insurance Division, filed September 2, 2016.
  6. Courts Divided Over Rising Insurance Costs, insurancenews.net, March 14, 2016
  7. Citi Research, https://pbs.twimg.com/media/CmqmeIbW8AIHgA7.jpg

Recent Court Case Identifies An Obvious Tax Liability: One TOLI Trustees Sometimes Miss

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.

For 10 years the policy owner took loans totaling $133,800 and allowed the debt to grow over the ensuing years, even after receiving updates on policy values spelling out the growing interest and policy debt. In October of 2011, the carrier notified the policy owner by letter that he would have to make a minimum payment of $26,061 to avoid termination, which would cause a taxable gain. The owner did not make the payment, and the carrier terminated the policy and issued a 1009-R to the policy owner.

The policy owner did not report the income on his joint tax return, though he and his wife did consult with tax advisors, including one that told them they were “going to owe a bunch of money.” Instead, they affixed a handwritten note to their return that explained that they did not know how to compute the tax and that the “IRS could not help when called.” They asked for a “corrected 1040 explanation + how much is owed.”

As you can imagine, this did not end well for them. According to the Tax Memo, the loans taken “resulted in a policy debt of $237,897.25,” “the termination of the policy in 2011 resulted in the extinguishment of” that debt, and “$150,397.25 (the amount by which the constructive distribution exceeded his investment in the life insurance contract) was includable in their gross income.”

This particular case seems straightforward enough. “Phantom income” will be always be attributed to a taxpayer who allows a life insurance policy to lapse when the debt on the policy exceeds the cost basis, yet, at ITM TwentyFirst, we have seen situations in which trustees have allowed this to occur. After bringing in a portfolio of policies, I once asked a trust advisor about one particular whole life policy with a very large loan and was told not to worry because “that policy has lapsed.” Luckily, with a minimal payment, it was reinstated. If not, it would have resulted in a taxable event of almost $200,000 for a trust that had no cash assets.

In another case, the liability was less transparent and off in the future.  A grantor with a portfolio of whole life policies had not been paying anything into the policies for years, allowing loans to pay the premiums. When we took over, we reached out to the agent who said he “had a plan,” essentially allowing the interest and loans to accrue on the policy. When we reviewed the policies, we realized that shortly the portfolio would be in jeopardy, and in short order, cash contributions would have to be made, or taxable lapses would occur. Even with the cash contributions, each year as the loans grew, the net death benefit on the policies would drop. This was not a good situation, and one that could have been avoided with a little educated foresight.

These two cases highlight two types of liabilities for trustees. The first is easy to see (but sometimes is missed); the second can only be seen with a thorough analysis (which is often not done). On Tuesday, September 27, ITM TwentyFirst University will be hosting a free webinar entitled, How Trustees Can Avoid Getting Sued. The session will include the thorough analysis we provided on the second case above as one of the “real life” case studies. The session will provide one hour of continuing education for both CFP and CTFA designations. To sign up, simply click this link: https://www.itm21st.com/Education.

 

Here is a New Twist: Actual Life Insurance Costs That Are Lower Than Illustrated

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.

Now, we are seeing something that is just as odd….carriers providing inforce current assumption illustrations with projected costs in the illustration that are higher than what they are actually charging.    

Our NYC office was reviewing a number of Phoenix policies for one of our institutional clients and found that the actual COI being charged in the policies was lower than what Phoenix was projecting in illustrations we received in 2016. However, when we compared what Phoenix is actually charging to illustrations received in 2012, the numbers lined up. While the actual costs being charged in the policy did not change between 2012 and today, the projected costs shown in the policy did.

The spreadsheet to the right demonstrates what we6-9-2016_chart found. There is an approximate 4% difference in COI costs between what is shown in the 2012 and 2016 illustrations, though according to Phoenix, there is no difference in the actual COI charged in the policy.

According to a Phoenix representative, their illustrations “need to meet certain tests prescribed by the industry” and the 2016 illustrations we reviewed “needed higher cost of insurance charges to pass these tests,” but “these are only illustrated values, the actual cost of insurance charges applied against the policy have not changed.”

Another one of the carriers projecting higher than actual costs in some in force illustrations is Lincoln Benefit. If you recall, Lincoln Benefit was sold by Allstate to Resolution Life Holdings, Inc., a UK based “run-off” company, for $600 million in 2013.  (See: Another Life Insurance Carrier is Sold…Why This Sale May Be Bad News For You and Your Clients.) In early 2014, a notice went out from the carrier that in “order to remain compliant with state regulations…illustrations for Ultra Plus and Ultra Index will now reflect higher current Cost of Insurance (COI), which will result in lower projected cash values. These changes will not affect our actual cost of insurance.” (Emphasis theirs.)

We reviewed Ultra Plus illustrations received in 2013 6-9-2016_chart2and 2016. As can be seen in the spreadsheet to the right, the projected illustrated costs shown are, in fact, higher in the 2016 illustrations. But we confirmed that the actual COI costs are in line with the 2013 illustrations.  The percentage difference is single digits for the next ten years, but then widens and in the later years increases rather dramatically. So, why is this occurring and what does it mean?  Life insurance policy illustrations must satisfy two tests, one called the self-supporting test and one called the lapse supporting test. Both are laid out in the Life Insurance Illustration Model Regulation, put out by the National Association of Insurance Commissioners (NAIC).

In the self-supporting test, on or after the fifteenth policy anniversary for single life policies or the twentieth policy anniversary for second-to-die policies, the accumulated value of all policy cash flows (premiums, interest, commissions, expenses, etc.) must equal or exceed the total policy owner value (cash surrender values and any other illustrated benefit available). The lapse supported test is a similar calculation, except that test must assume zero policy lapses for policy years six and on.

It appears that the higher illustrated COI will simultaneously increase the policy cash flow amount and lower the total policy owner value in those illustrations, helping the carriers meet both tests.

For those of us managing life insurance, we will just have to make adjustments. The Lincoln Benefit announcement mentioned before said that their projections will typically show a lapse that is one to four years earlier than will actually occur (based on actual current assumptions).

Which begs the question(s):

  • How many other carriers out there are providing illustrations that are not based on reality? We at ITM Twenty First will keep looking and report back.
  • And are these “illustration issues” a precursor to future COI increases? Some Phoenix policies were subject to litigation that required them hold COI costs current for a period of time. As we mentioned, Lincoln Benefit is now owned by a run-off company with no marketing vision for life insurance, just a business model determined to maximize profits.

We at ITM TwentyFirst truly do try to be fair to the carriers and we recognize they have walked into a “perfect bad storm” of negative interest rates and increased regulation and reserve requirements. It is a challenging time for all in the insurance industry, especially for the clients that we serve.

As we move ahead, we will report back with any new information.

 

Another Major Carrier Raising Cost of Insurance Charges

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.)

While it appears the cost increases will begin in June of 2016, it appears the exact dates are policy specific.  In sample letters to policy owners, Lincoln notes that “the expected cost of providing insurance coverage has risen, due to a variety of factors including lower investment income and higher expenses.”

Like other carriers who have raised rates, Lincoln is providing the policy owner with suggested options, including; continuing to pay current premium, though “at some point you may need to increase the amount of premium paid in order to keep your policy in force,” lowering the death benefit amount to “the level supported by your current premium,” or surrendering the policy.

It appears there are approximately 18 products affected with issue dates from 1983 to 2000, with many policies issued in the 1990’s. In the letters to policy holders, Lincoln Financial is providing customer service email and phone numbers.

We at ITM TwentyFirst have not reviewed any of the policies yet to determine the extent of the COI increase.  Lincoln National has not announced the percentage increase, saying only that the “amount of the COI rate increases depends upon the product.”

As always, we will be monitoring the situation.

The Year in TOLI – 2015 Edition

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.

One of the initial benefits of the merger was the introduction of ITM University, a web-based educational series providing free CE for CFP® and CTFA designations. The sessions focus on managing TOLI trusts and other hard-to-value assets, as well as other important topics like the looming Department of Labor (DOL) Fiduciary Regulations. See https://www.itm21st.com/Education for a listing of our first sessions for 2016.

In the Trust Owned Life Insurance (TOLI) world, 2015 saw a slight increase in institutional pricing for TOLI services. We have heard anecdotally of some large payouts for TOLI policy mismanagement (none of our clients). It appears trustees are finally just beginning to truly understand the liability of this asset class and to price their services to reflect that.

The successor trustee business saw an uptick in 2015. Trustees are realizing that if they cannot manage this asset profitably while also mitigating liability, it might be better to offload the asset to someone who can. We know trustees that will accept these TOLI trusts, and their business is booming.

We spoke earlier in the year about the problem trustees have when managing policies that do not live up to sales illustration expectations. See Life Insurance Illustration Assumptions…a Trustee’s Dilemma. The life insurance industry has often provided what turned out to be overly optimistic sales illustrations since they tend to drive policy premium costs lower, making the sale a bit easier. This year, the National Association of Insurance Commissioners (NAIC) took a look at the sales practices being used to sell the industry’s hottest product, Indexed Universal Life (IUL), and decided that the hypothetical rates shown in these illustrations were, in fact, overly optimistic. In September, the NAIC published a new regulation that limits the maximum crediting rate that can be shown on both sales and in-force ledgers for IUL policies to approximately 7%, with slight carrier and product variation based on the specific methodology used. See Actuarial Guideline XLIX Will Mandate More Realistic Assumptions for Index-Based Life Insurance Policies.

Managing a life insurance policy has not gotten easier, for sure, unless your name is Max-Hervé George (See The Best Life Insurance Policy Ever . . . Unless Your Name is Aviva), who could be a billionaire by his 30th birthday because of an odd fixed-price arbitrage life insurance contract that allows him to place his investment bets in the policy cash value while essentially knowing the outcome. His good fortune is Aviva’s problem, and litigation surrounding the policy contract continues.

For the rest of us managing this asset, it is definitely harder. The low interest rate environment, even with the Fed’s bump a week or so ago, is going to be with us a while. The effect of the low interest rates on policies, especially Current Assumption Universal Life (CAUL) policies, has been dramatic, with the cost of insurance (COI) in some policies rising, something that was unheard of just a few years ago. We first sounded the alarm on the COI increase in an August blog when we cited an email from back in 2013 that warned us they might be coming. In that blog entry (See Notice to TOLI Trustees: Universal Life Costs ARE on the Rise), we referenced the Legal & General and Transamerica COI increases. Those increases were quickly followed by COI increases from Voya and AXA. We showed the effect of these increases in detail for both Transamerica (See Transamerica Cost Increase Causes Premium to Maturity to More Than Double: A Case Study for Trustees and AXA’s Athena II (See Taking a Look Under the Hood of the AXA Athena II Universal Life Cost of Insurance Increase) policies.

As the year came to a close, we wrote about another unprecedented occurrence, the decision of Transamerica to no longer run in-force ledgers based on current assumptions for a specific group of Universal Life policies. According to the carrier, they will only illustrate “the guaranteed future interest rate and monthly deductions” on that group of in-force policies. See Transamerica Now Making It Almost Impossible to Manage Their Life Insurance Policies. This decision makes it virtually impossible to understand the actual policy performance on those products.

The year ended with a December 21st class action filing against John Hancock Life Insurance Company (U.S.A.) for allegedly forcing policyholders to pay “unlawful and excessive cost of insurance (COI) charges,” as well as “unlawful and excessive premiums.” See John Hancock Hit with Class Action Lawsuit Over Cost of Insurance In Some Universal Life Policies.

To say the landscape changed a bit this year for those of us managing life insurance policies would be an understatement. For trustees, the challenge has grown much larger, and over the next few years, I believe that those without the requisite knowledge to manage this cumbersome asset will have to reassess their TOLI business.

Each year, carriers spend millions of dollars promoting the sale of new life insurance policies, with few companies focused on maximizing the over $11 trillion of life insurance already in force. We at ITM TwentyFirst have always believed that that our job is to provide unbiased life insurance expertise to protect life insurance policy owners by helping them make informed decisions. We appreciate the trust and faith our clients have placed in us and look forward to 2016. Though there are challenges, we are excited about the additional resources we now have to manage life insurance and look ahead to the year with great anticipation.

Happy New Year from all of us at ITM TwentyFirst!

Taking a Look Under the Hood of the AXA Athena II Universal Life Cost of Insurance Increase

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.

The COI increase was limited to those policies originally issued to people age 70 and above with a policy face value amount of $1M or more.  The Athena Universal Life II policy does contain a death benefit guarantee, the Lapse Protection Rider (LPR.)  The new COI rates will not increase the premium needed to keep the LPR in force, so long as no loans are taken on the policy, no changes are made to the policy and sufficient premiums have been paid to keep the rider in force. Policies without the rider will need additional premium to keep the policy from lapsing.

As we mentioned in our blog on the Transamerica COI increase entitled, Transamerica Cost Increase Causes Premium to Maturity to Jump Over 200%: A Case Study for TOLI Trustees, the COI is deducted monthly from the policy cash value and is calculated by multiplying the cost per $1,000 dollars of death benefit coverage by the net amount at risk, which in a level death benefit policy is defined, in general, as the difference between the cash value and the death benefit.  Remember, in a level death benefit policy the carrier keeps the cash value when the policy death benefit is paid out.

Net Amount at Risk = Death Benefit Minus Cash Value

For example, if we had a $100,000 death benefit policy with a $50,000 cash value and the monthly COI was $1 per $1,000, the monthly COI would be $50.

$100,000 – $50,000 = $50,000 Net Amount at Risk

$50,000 x $1/$1,000 = $50 monthly COI deducted

As mentioned, AXA targeted the increase based on the size of the policy and the age of the insured at the time the policy was issued. The exact amount of the increase appears to be determined by the age at issue, with those policies issued on insured’s in their 80’s seeing a much higher increase than those issued on insured’s in their 70’s.Charts_Blog76yrold

Frank Tomasello, in our NY office, is reviewing the AXA Athena II polices that we manage and has found that those policies issued on insured’s in their 70’s appeared to show an approximate 29% increase in COI rates. The chart to the right shows the cost increase for a policy issued to a 76 year-old female standard non-smoker. While a complete analysis of all ages and underwriting classes was impossible, we did run other scenarios and found very similar outcomes. For example, the COI increase on a preferred non-smoker male issued at age 73 matched the percentage increase shown to the right almost exactly.

The AXA Athena II policies issued to insured’s in their 80’s appear to have much higher COI Charts_Blog81yroldincreases, based on our limited survey. The chart on the left shows the COI increase for a policy issued to an 81 year-old male standard non-smoker. As can be seen, the increase climbs to 72 percent, a hefty increase indeed. In fact, if the insured on this policy were to live approximately seven more years, the COI paid on the policy would equal the net amount at risk death benefit. In other words, you would have paid $1,000 for every $1,000 of coverage obtained. And that does not include the costs that were paid in the previous eight years of the policy.

While the cost increase seems large, it is interesting to note that the COI after the cost increase appears to be in line with the COI in at least one other AXA UL product.

When we compared the post-increase COI in the Athena UL II policy in our first example, with an Athena UL DB on a female nonsmoker at the same issue age, we see that the costs are similar.

Charts_BlogCompareThe chart to the left shows the monthly COI for both products. You can see that in the first three years, the post-COI increase Athena UL II is costlier, but it becomes less expensive over time, relative to the UL DB product. If the policies were held to maturity the cumulative cost would be slightly less in the UL II policy. While policy design may play a factor, this would suggest that the UL II product was, when issued, slightly “below market cost” and the cost increase simply brought its cost structure in line. In fact, when we compared the Athena UL II product to other similar products at the same issue age and underwriting, including products from NY Life and Lincoln National, we found that, in general, the Athena UL II product, pre-price increase had, on a cumulative basis, a lower COI than the other policies reviewed, while the post-increase COI was in line with the other policies.

While the COI increase may have just brought the AXA UL II policy in line with other products in the market, including AXA’s own product, this does not bring much comfort to those dealing with the funding of these policies going forward.