Recent price hikes on permanent life insurance policies have raised the ire of consumer groups and left some policyholders with a distasteful choice: face paying more money to keep policies in-force or letting their coverage lapse.
The hikes have even led to a class-action lawsuit filed earlier this month against AXA alleging unlawful and excess cost of insurance (COI) increases, which carriers apply to recover the cost of paying death benefits, agent commissions and policy administration.
Advisors complain that form letters from carriers distributed to retirees warning them of price increases just end up in the dust bin. That plays into the carriers’ favor since they don’t have to pay the death benefit on a lapsed policy.
“I’ve seen too many of these policies lapse,” said John Crosby, managing director of Individual Financial Services in Middletown, N.J.
“99 percent of people are going to look at it and put it in the garbage,” said David Buckwald, CEO and senior partner of Atlas Advisory Group in Cranford, N.J., in an interview with InsuranceNewsNet.
Premium expense charges on Buckwald’s 79-year-old mother’s universal life (UL) policy have gone up 5 to 10 percent and the cost of insurance (COI) charge is going up 10 percent. “In 28 years this has rarely happened,” he said.
That may be true, but do carriers really deserve the blame?
The fine print, or not-so-fine print, in the policy language clearly states that carriers are within their bounds to raise the cost of permanent life insurance, which they need to do to remain profitable in changing economic environments.
The most important change in the economic environment has been the drop in interest rates over the past 30 years, since many of the policies were issued. In the early 1980s, interest rates were in the 12 to 14 percent range.
Now, with rates in the 4 to 5 percent range, declining investment portfolio yields have made it difficult for carriers to meet their obligations on those UL policies. Many of those policies have guaranteed crediting rates of at least 4 percent.
With interest rates at or below the guaranteed policy rates, many insurance carriers are in the red on their UL blocks.
Carriers Raise COI, Whole Life Affected, Too
Last year, big names raised COI rates, according to research issued last month by M Financial Group in Portland, Ore.
Transamerica announced COI rate increases on some UL policies; Banner Insurance and William Penn raised COIs for no-lapse guarantee UL plans issued from 1996 to August 2008; U.S. Financial Life, an AXA subsidiary, jacked up COIs on Nova and SuperNova UL contracts; Voya Financial hiked some charges on COI on nine UL and no-lapse guarantee products bought before October 2009; and AXA raised COI to Athena Universal Life II on Jan. 1, 2016, M Financial found.
Voya’s action had a negative impact on about 28,000 policies, according to M Financial.
“As is common practice across the industry, we periodically evaluate the expected costs related to providing life insurance coverage to customers,” said Dave Wilken, president of individual life for Voya Financial, in an email to InsuranceNewsNet.
“Based on the results of such a review, we recently informed certain customers that their cost of insurance would be increasing, while communicating the options available,” Wilken added.
In-force whole life policies are also in for increases, and many advisors may not even realize it, according to a recent advisor-only newsletter issued by NBW Insurance Group in Minneapolis.
Whole life carriers are not required to disclose expense increases to policyholders, but since a dividend by definition encompasses both income and expenses, “some whole life companies are disguising expense increases without fanfare,” according to NBW Insurance Group.
Consumer advocates are calling the hikes “unfair,” and warn that thousands of UL policies around the country may be a risk. Without COI increases or higher expense charges, policies are in danger of “falling apart,” or collapsing before the death of the policyholder.
Regulators should block cost-of-insurance rate increases when used to avoid guaranteed interest rates in UL policies, said James H. Hunt, life insurance actuary for the Consumer Federation of America, which has warned of the practice becoming more widespread.
Where Were the Agents?
Agents and advisors say insurance carriers could do a lot better than sending form letters to UL contract holders. Mailing letters to policyholders announcing rate hikes perpetuates stereotypes that insurance companies don’t care for policyholders.
Carriers could have agents call policyholders directly, or establish hotlines for policyholders facing hikes or send them formal illustrations, Buckwald said.
Wilken rejects the notion that carriers don’t care.
“Our partnerships with our agents and policyholders are important to us, and we have communicated these adjustments to them in a clear and transparent manner,” he said.
After increases go into effect, rates will still be below the maximum rates allowed under the policies, said Gregory W. Tucker, senior vice president for corporate communications for Transamerica.
By and large, agents don’t blame the carriers for raising rates. Rather, some agents are wondering why in-force policies aren’t receiving better service.
Why didn’t the agents call the universal life policyholders to remind them their policy was about to lapse? Why didn’t advisors look for an alternative to help UL policyholders. It’s not as if interest rates suddenly plummeted.
December’s benchmark rate increase was the first in seven years. Where were the agents during that time?
Was there an option of reinsuring the UL contract? How about rolling the policy over into a new policy with another carrier? Or, how about dropping the face amount as a way to lower the premium? Such options are rarely considered, advisors say.
Aging UL policyholders with vague memories of their insurance contracts signed long ago, need to dust off polices or get help right away, Crosby said. Call the children, call a trustee, call the agent on the policy, talk to someone at the home office of the insurance carrier, he said.
Agents who originally sold the policies may themselves be retired and no longer servicing the contracts, or the block of policies may have been sold to another carrier or reinsurer. That means reference numbers on the hard copies may no longer be valid.
Since agents don’t make any money by “servicing” a policy, they have little incentive to follow up with policyholders.
Annual reviews of insurance portfolios are a must, Crosby said, for this very reason: too many people and agents treat their policies as if on autopilot, only to find out too late that premiums may skyrocket.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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