Illustration Restrictions Placed On Some John Hancock Inforce Policies

In the past we have written about limitations on obtaining ledgers to manage inforce life insurance.  In one instance the inability to provide in-force ledgers based on “current assumptions” was a precursor to a cost of insurance (COI) increase.

Our servicing team recently received notice that due to a “temporary” situation John Hancock cannot provide inforce ledgers on its Performance UL Policies issued in particular states from 2003 to 2010.

According to the information received from the carrier, they are unable to provide this information because “regulatory standards that govern illustration practices…prevent us from illustrating currently payable amounts based on our current non-guaranteed elements.”

John Hancock is “reviewing the non-guaranteed elements applied to these Policies because emerging experience has differed from the current assumptions which are reflected in the illustrations” and it expects the review to be completed “in the first half of 2017.”

The carrier notes that if the review results in “changes to Non-Guaranteed Elements such changes will not take effect before the policy anniversary immediately after the completion of the review.”

While we do not wish to speculate on the future actions of a highly rated and respected carrier, we will be closely monitoring the situation.

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

Two More Lawsuits Filed Against AXA For Cost of Insurance Increases

Two lawsuits were filed one day apart last week against AXA Equitable Life Insurance Company for cost of insurance (COI) increases in its AXA Equitable Flexible Premium Universal Life Athena II policies. We “looked under the hood” of the AXA policies affected by these cost increases back in November of 2015. The increases were limited to those policies originally issued to people age 70 and above with a policy face value amount of $1 million or more, which factored into the substance of both lawsuits. There are now at least three lawsuits filed against AXA, including one we wrote about back in February of last year.

The first suit, filed January 18 in Arizona (Wenokur v AXA Equitable), accuses AXA of “improperly targeting a subset of policyholders who exercise their contractual rights to keep their accumulated policy account values as low as possible and pay flexible premiums.” According to the suit, the “exorbitant” cost increases were designed to force policyholders to “take one of two unsavory courses of action”; either pay increased premiums that the carrier “knows would no longer justify the ultimate death benefits” or surrender or lapse their policies.

Though AXA stated the increase was “warranted” because “affected insureds are dying sooner than AXA anticipated,” the suit points out that in a regulatory filing in February of 2015, the carrier answered no to the question asking whether its “anticipated experience factors underlying any nonguaranteed elements [are] different from current experience,” and also pointed out that “mortality trends for the affected insureds have improved substantially since the time the policies issued.”

The lawsuit states that AXA “violated the terms of the policies” by “targeting only a subset of a risk class” and by basing the increase on unreasonable assumptions, breached the contract. Though AXA based the increase at least partly on expectations of “investment experience” in the future, the suit points out that investment experience is not a listed factor that may be considered for increasing COI rates, though “investment income” is, but “even if AXA’s investment income has changed, this factor cannot justify inflicting a COI increase solely on the subset of AUL II policies upon which AXA has sought to impose the COI increase (those with higher issue-ages and face-amounts).”

The second suit (Hobish v AXA Equitable), filed the next day in the Supreme Court of the State of New York, accuses AXA of “breach of the terms of the policy, deceptive business practices, and excessive, unconscionable and unlawful premium increase.”

The insured was issued the policy at a standard nonsmoker rating class. According to the suit, the policy contract stated that any changes to interest rates, charges, or other deductions would be on a “basis that is equitable to all policyholders of a given class.” When contacted by the insured, the carrier stated the cost increase would apply only to a class of insureds “with issue age of 70 and above and with a face amount of $1 million and above.” According to the lawsuit, nowhere was that class identified. The only policy class that was identified was the insured’s rating class of standard non-smoker. “Nothing in the policy permits AXA to imposed a COI increase based on the issue age or face value of the policy,” according to the suit.

The lawsuit also accuses AXA of deceptive business practices in violation of New York business law since they targeted consumers aged 70 and “misled” these consumers “into believing they would not be targeted for premium increases” that were “not applied generally and equitable to all members of a designated class.”

The suit cites the “predatory increase” in the cost of the policy as a “flagrant tactic to increase revenues and to drive aging individuals out of their policies.” In this case, the plaintiffs surrendered the policy on the insured, then age 92, “under protest” four months after the cost increase took effect. They received $412,274 as surrender value for the $2 million policy, after funding the policy with a total of $913,804 in premium payments.

For copies of both of these lawsuits, email mbrohawn@itm21st.com

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