Class Action Lawsuit Filed Against Lincoln National For COI Increases In Jefferson Pilot Policies

A class action lawsuit was filed last week in the Eastern District of Pennsylvania against Lincoln National Life Insurance Company on behalf of the owners of Jefferson Pilot-issued, JP Legend 100, 200, 300 and 400 series life insurance policies.   Lincoln National purchased Jefferson Pilot in March of 2006.

We wrote about this COI increase in August of 2016.   The announcement from the carrier at that time noted COI changes, stating that while most of the changes were increases, there were some decreases, “reflecting Lincoln’s commitment to acting fairly and responsibly.”

The class action lawsuit alleges the COI increase breached the contracts underlying the policies in several ways.  First, the “increases were based on non-enumerated factors” since “the 3 factors that Lincoln relies upon to justify the increase could not possibly justify an increase of the size” of the policies in question.  Those three factors included “its estimates for future cost factors of investment returns, mortality assumptions, and reinsurance costs.”  According to the suit, the carrier’s “expectations of future investment returns could not reasonably be materially lower than what Lincoln originally expected—and certainly not nearly so much lower as would be need to justify” the stated increases of “50-90%,” which are in line with the ITM TwentyFirst analysis of these policies in portfolios we manage.  The suit points out that, in filings from 2010 to 2014, Lincoln stated, “It expects mortality experience to improve.” The lawsuit also notes that “Mortality (normally the most important element in COI charge rates) has continuously improved nationwide since the policies were issued.”  Reinsurance costs “cannot provide material support for the increase, and reinsurance costs are not an enumerated factor for an increase,” according to the filing.

Second, the suit alleges that cost increases were not designed to respond to expectations but to recoup losses.  The policy contract states, “[R]ates will be based on our expectation of future monthly interest, expenses, and lapses,” which “forbids COI increases that are based on a carrier’s desire to increase profits or to make up for past losses,” according to the lawsuit. The lawsuit also indicates that Lincoln admitted they were focused on the past, not the future, since they pointed to a “decade of persistently low interest rates” and the “recent historic lows” to provide a rationale for an increase when the costs were announced.

In addition, the suit points out that the cost increases were not uniform “across insureds of the same rating class” and notes “COI rates being higher when the insured is 98 years old than when she is 99.”   According to the suit, the “strange and illogic shape” of the cost increase “could not possibly have been replicated for every one of the same rating class,” which violates the contract provision. This provision states, “any change in the monthly cost of insurance rates used will be on a uniform basis for Insureds of the same rate class.”

The lawsuit also points out that, by refusing to provide an illustration while the policy was in the grace period, Lincoln breached the contract. During the grace period, the policy is still considered to be in force, and the contract language states that the carrier would, if asked, “provide, without charge, an illustration showing projected policy values based on guaranteed as well as current mortality and interest factors.”

The suit seeks damages and court costs, along with reasonable and necessary attorneys’ fees, an injunction against the increase, treble damages, and “such other relief as this Court may deem just and proper under the circumstances.”

For a copy of the lawsuit, contact mbrohawn@itm21st.com.

USAA Settles Class Action Lawsuit Over Cost Increase In Term Policies

Last week, our Cedar Falls, Iowa, office received notice of a class action lawsuit settlement. The settlement, stemmed from a suit filed in Alabama, Erkins v. USAA Life Insurance Co.

According to a complaint filed on October 20, 2015, (1) Moses Erkins purchased a “Level Term Life Policy” with premiums designed to remain fixed for the “Level Benefit Period.” The $250,000 policy had a 20-year level death benefit period with a $1,025 “current” premium. After the 20- year period (up on July 20, 2017), the $1,025 annual premium would purchase a decreasing amount of insurance. The $1,025 premium cost was guaranteed for the first 5 years only, after which premium costs could increase.

The policy contract listed both the current and guaranteed premium cost of coverage, but according to the complaint filed, the policies were sold by USAA with “Current Premiums set substantially less than the maximum guaranteed premium and, with the Defendant’s stated expectation that the Current Premiums were planned to remain the same for the full duration of the contracts. Otherwise, the Policies would be prohibitively expensive and could not be marketed as they were.”

According to information provided in the settlement, (2), USAA did not “increase premium rates on any of the policies … before the end of the Level Benefit Period, but a premium increase” was “planned to take effect after the Level Benefit Period.” The plaintiff argued that in order for USAA to increase the costs in the policy it could only do so based on “expectations of future changes in mortality experience, expense experience” or “investment performance change from those expectations used in the original pricing of the Policies.”

The court did not rule in favor of either USAA or the plaintiff, instead a settlement was reached. According to settlement information, USAA agreed to provide “Settlement Class Members who submit a valid and timely claim form either a two-year term certificate or a single payment of varying amounts,” depending on their category.

In addition, USAA agreed to “provide additional written notice to all In-Force Policy Owners to inform them that their premium will increase after the Level Benefit Expiration Date.” They also agreed that there would not be any “additional re-pricing of the Policies for five years after the Effective Date of the settlement.”

It is unfortunate that the court did not rule in this case to provide us with some guidance on the issue of cost increases in life insurance policies. USAA, founded to provide a wide array of services for military member and their families, has consistently garnered high ratings from many consumer groups over the years and given the relatively small amount that they had to pay out, it is understandable why they decided to settle.

  1. Moses Erlins v USAA Life Insurance Company, Circuit Court of Barbour County Alabama, 10/30/2015
  2. LevelTermPolicySettlment.com

 

Life Insurance: An Efficient Way To Pass On Wealth

Life insurance has been a challenging financial product to manage in the last year or so and we have written often about the issues that surround this asset. But we also believe that this is a powerful financial tool. In our last blog entry we wrote about its use to mitigate the negative effect of a tax law change that may occur in 2017. At ITM TwentyFirst, we manage life insurance, we do not sell it. In fact, we are one of the few firms that manages life insurance without earning any compensation from sales. We show our support not just by managing in-force business as efficiently as possible for trustees, grantors, and especially beneficiaries nationwide, but also by pointing out the value of life insurance as a tool to efficiently leverage assets for the next generation, especially in a trust setting. We believe strongly that life insurance, when selected properly and managed efficiently, can be one of the most important assets a person owns.

For many insureds, the internal rate of return on a life insurance policy held in trust is appealing compared to alternative fixed investments, even if fixed interest rates begin to kick up a bit over the next few years. And the use of life insurance for older aged insureds can actually make the golden years more enjoyable by freeing up additional cash flow.

Here’s an example: A couple, both age 65, have come to an advisor for financial advice and estate planning as they enter their retirement years. Assuming that both are in good health (preferred, non-smoker underwriting), they could purchase a $1,000,000 Survivorship Guaranteed Universal Life (SGUL) policy from an A+ AM Best rated company for an annual premium of about $13,420. If you have attended any of our education sessions, you know that a GUL policy has a required fixed premium, one that, if paid in full and on time, guarantees the policy death benefit no matter what happens with interest rates or other market factors. (1) A survivorship policy, often used in estate planning cases, pays a death benefit at the second of the two insureds’ deaths.

If we calculate the internal rate of return (IRR) on the death benefit (2), in this example, we see that the policy’s rate of return (shown in spreadsheet to the right) is extremely attractiv1-irr-fixede. Even if the insureds do not pass away until their mid – 90’s, the rate of return on the premium funding the policy will be over 5%. Should death occur earlier, the rate of return will be much higher. Remember that a life insurance death benefit is received free of income tax and, if placed in a trust, is not subject to estate taxes. With this particular policy, the death benefit is guaranteed, locking in the returns. (3) What other asset can your clients purchase that will enable them to pass on wealth this efficiently?

For the client who wishes to maximize his or her retirement lifestyle while also leaving a legacy, life insurance can actually help to smooth out retirement income. Though an annual premium payment will have to be made to the trust (in this case, equal to 1.34% of the death benefit), the comfort in understanding that a known, completely tax-free amount will pass to beneficiaries at death can free up additional funds for retirement activities.

Life insurance is a powerful financial tool. When properly designed and managed wisely, it can create a legacy more efficiently than almost any other asset. As we mentioned in our last post….The next few years will provide challenges and opportunities for…advisors to help clients rethink their financial plans and goals. ILITs will remain a viable tool for leveraging assets.

  1. ITM TwentyFirst does not sell life insurance, nor do we advocate one type of life insurance. Every life insurance purchase should be based on the personal situation (health, cash flow, risk tolerance, etc.) of the insured. There is no one “best policy” for all situations.
  2. The IRR on death benefit is the net rate of return that would need to be earned if the cumulative premium were invested in an alternative asset.
  3. The policy death benefit is guaranteed as long as the premium is paid in full and on time. While market risk is eliminated, carrier risk must still be monitored.

A Possible Tax Law Change in 2017 May Lead to Another Use for ILITs

Earlier this year, the Senate Committee on Finance voted to kill a strategy used to greatly enhance the value of an Individual Retirement Account (IRA). Permitted since 1987, the so-called “Stretch IRA” plan allows an IRA beneficiary to take distributions from an inherited IRA out over his or her lifetime, allowing the IRA account to grow tax-deferred and stretching the tax bill over many years. Many IRA owners have named children and even grandchildren as beneficiaries, making the strategy a useful tool to leverage assets to later generations.

This is not the first time the strategy has caught the eye of legislators, probably because it is projected the change will generate $5.5 billion in additional revenue over 10 years, but the Republican-led Committee, which includes 14 Republicans, voted unanimously, leading many to believe that, this time, action will be taken.

The change affects only non-spousal beneficiaries, who would have to pay taxes on an inherited IRA within five years of the owner’s death, with the first $450,000 excluded. However, the balance would be taxed at the beneficiary’s marginal rate. Surviving spouses could still stretch the taxes out over their lifespan or even roll the inherited amount into their own retirement plan.

With over $25 trillion in untaxed retirement accounts and $7.8 trillion in IRAs alone, (1) it is no wonder the government is looking to gather its tax money as soon as possible.

If the law is enacted, some financial advisers suggest converting to a Roth IRA. However, under the proposal, a Roth IRA left to a non-spousal beneficiary would also have to be distributed within five years, just like a traditional IRA. While the eventual Roth IRA distributions would be tax-free to the beneficiary, the conversion would be taxable to the IRA holder.

Another option that might provide more flexibility and greater leverage would be the use of an Irrevocable Life Insurance Trust (ILIT). As with the Roth IRA strategy, the IRA distributions to fund the plan would be taxable, but the life insurance death benefit could be passed on free of federal and state income and estate taxes.

According to Ed Slott, a noted IRA authority, life insurance makes sense. In an article just published in a financial planning magazine, he suggests, “Forget the stretch IRA. You’re better off taking the money out now, paying the taxes, and putting that money into a life insurance policy that will be tax-free when it’s cashed in. You could easily take a $300,000 IRA and turn it into a $1 million life insurance policy.” (2)

The next few years will provide challenges and opportunities for trust advisors to help clients rethink their financial plans and goals. ILITs will remain a viable tool for leveraging assets.

 

  1. From information provided by the Investment Company Institute, Washington, D.C.
  2. Stretch IRA: Are Its Days Numbered?, Financial Advisor Magazine (www.fa-mag.com), December 27, 2016

Latest Federal Reserve Hike Viewed as Generally Positive for Life Insurance by Moodys

Less than two weeks ago, we reported that Moody’s had downgraded its 2017 outlook for the life insurance sector from Stable to Negative. A new Moody’s report published after the Federal Reserve raised its benchmark federal funds target rate by 25 basis points last week indicates that hike will benefit life insurers and “help reverse the downward march in investment portfolio yields.” (1)

The federal funds rate is the interest rate that depository institutions charge each other for an overnight loan. Banks are required to keep a minimum reserve requirement and will move monies back and forth, charging a rate based on the target rate set by the Federal Open Market Committee (FOMC), which is the Federal Reserve’s primary monetary policymaking body.1-fedres2

As can be seen in the graph to the right,
the federal funds rate that is actually charged dropped dramatically through 2008 as the target rate sank and stuck at 0 to .25 percent. A bump in December of 2015 pushed the target to .25 to .50 percent. Last week’s increase pushed the target rate to .50 to .75 percent.

While the rate only pertains to overnight loans among very creditworthy financial institutions, its effect is actually broader since banks use it for the basis of all other short-term rates. It also indirectly affects longer-term rates, such as home mortgages. An article in the Wall Street Journal yesterday declared, “The era of the ultralow mortgage is over.” It also pointed out that after the US election, even before the Fed acted, rates on a 30-year mortgage jumped .76 percentage points, to 4.38%, (2) the “post U.S. election bump in yields” we mentioned in our prior blog.

The increase in long-term rates would be a welcome relief to life insurance carriers who have struggled mightily in this low interest-rate environment. Insurance companies attempt to match their investment time horizon with their liabilities, and life insurance is a long-term liability. The Moody’s report points out that “new money rates on long-duration investments are more important for insurers,” a good benchmark for new money rates of life insurers being the 10-year treasury plus a credit spread, which has seen a “100 basis point rise…from… summer lows.”

Should the long-term rates become sustainable, Moody’s sees the profitability of older annuity blocks improving and believes “interest-sensitive life insurance,” like universal life, would benefit, along with other “long-tailed specialty products” like long-term care, both of which have seen dramatic cost increases in the last few years. With increased rates, the pressures on carrier reserves would lessen, and the chances of GAAP charges and write downs would decrease.

The Moody’s report believes this might be a first step toward a “more normalized policy rate environment that would be conducive to better long-term operating conditions and profitability.” Let’s hope so, but let’s also remember that the current target rate hike, only the second in 8 years, only pushed the rate from .50 to .75 percent. A decade ago, a “normal” fed funds rate was 5.25 percent. We are a long way from that.

  1. Moody’s Sector Comment, December 14, 2016, Financial Institutions, United States
  2. Rising Rates Ripple Through Mortgage Market, Wall Street Journal, December 19, 2016

The Biggest Story in Trust Owned Life Insurance (TOLI) in 2016? Trustees Running Away From Their Portfolios-How Can They?

In blogs published throughout 2016, we highlighted the increased challenges for TOLI trustees attempting to manage life insurance policies prudently. Life insurance cost increases more than doubled the carrying costs of many policies, while there were increased fiduciary and regulatory burdens and a multimillion dollar verdict against a major financial institution over a life insurance policy. All this occurred in 2016 and underlined the difficulties and risks associated with managing this asset.

Many banks and trust companies have TOLI portfolios that are filled with “orphan” trusts, with clients that have no other wealth-management relationship with the bank. These portfolios, many obtained through acquisition, often contain much more risk than revenue, and as institutions await a new presidential administration that appears to favor an end to the federal estate tax, some are looking for an exit strategy.

In the past year, we have witnessed and assisted in a number of “bulk transfers” of TOLI portfolios from institutions wishing to exit the business to other firms still committed to servicing this asset. The exiting firm can offload all of the TOLI trusts in their portfolio or just a select group. Generally, in a bulk transfer the selected trusts are moved at once, with one trustee taking control over them from another at a specified date. Obviously, this is not a transaction that will fit with every firm’s business goals, but for those that can take advantage of the transaction, it can be a true win-win scenario.

On Tuesday, December 13, at 2 p.m. Eastern time, ITM TwentyFirst University will feature Leon Wessels, a 15-year veteran of the TOLI industry, who will discuss Knowing Why, When and How to Move ILIT Accounts Out of Your Portfolio. This will be our last session of 2016, and if you are contemplating any changes to your TOLI business in 2017, it will be one you will want to attend. To register, click on the following link: https://www.itm21st.com/Education

 

Ratings Agency Downgrades Outlook For Life Insurance Sector, But Others See Positive Opportunities For The Future

A report just out from Moody’s on the global life insurance market has downgraded the sector for 2017 from Stable to Negative. (1) The historically low interest rate environment is cited as a main reason. Moody’s acknowledges the “post-U.S. election bump in yields” we have seen after Donald Trump’s victory, but still believes the low rates will continue “to depress the sector’s investment returns and profitability.” While interest rates may be pushing slightly higher, rates credited to policies take a longer time to turn around, a fact we acknowledged over two years ago (see: Turning the Battleship Around…An Update.) For Moody’s, the low rates are “the main driver for the outlook change to negative.”

Another consideration was the increased market volatility that could occur because of higher worldwide political risks and uncertainty in 2017. This could negatively affect carriers’ earnings and drive risk-averse clients to products containing higher guarantees, which demand larger and costlier reserves. Increased regulation and higher reserve requirements were other factors affecting the rating downgrade.

The low interest rate environment also drives carriers to chase higher returns in illiquid and alternative investments, as well as equities. While these asset classes may bring higher returns, they pose more risk than the fixed investments that make up the bulk of a carrier’s portfolio.

The United States, Japan, the United Kingdom, Germany and the Netherlands were among the specific countries Moody’s cited as earning a Negative grade.

In another report out this year, EY believes “stagnant growth and lingering low interest rates” mean the life insurance sector “faces a challenging future,” but points out some areas of change that might positively affect the industry. (2) These include “new thinking and cultural shifts,” especially in the area of innovation. The industry as a whole has been slow to modernize, and developers in other areas are beginning to creep into the life insurance space. These “disruptors” are providing applications and systems designed to improve the customer experience, while streamlining the life insurance process. Data-driven companies entering or in the marketplace, including ITM TwentyFirst, will change the way life insurance is underwritten, sold, and monitored. The report points out the “perception problem” of an industry with difficult to understand products that many believe are out of touch with today’s consumers and cites the need for “engaging and educating customers with media…that customers are comfortable with.” By adapting to the changing world, EY sees tremendous opportunity for innovative companies in the space.

The ITM TwentyFirst team of independent life insurance professionals helps to empower policy owners to make informed decisions and realize the full value of life insurance assets. We appreciate the opportunity to be a part of the state-of-the-art changes taking place in the evolution of life insurance and life insurance policy management.

  1. “Life Insurance – Global: 2017 Outlook – Low Interest Rates, Risk of High Volatility and Legislative Changes Turn Outlook to Negative,” Moody’s Investors Service, December 5, 2016
  2. “2016 Life Insurance and Annuity Executive Survey,” EY, 2016