By Ron Sussman
The life insurance industry’s success is built largely on trust. Consumers enter into decades-long contracts with the belief that the insurer will honor the original terms of their policies. But an unprecedented type of premium increase is starting to wreak havoc on consumers, and it could jeopardize the life industry itself.
At least four large carriers have already enacted these rate hikes, resulting from jumps in the cost of insurance (COI) they charge to existing customers. COI is the charge associated with mortality risk; the pure insurance protection element of the policy.
For generations, most life carriers have explicitly stated COI increases are unthinkable. Now, with the breaking of this promise by several major companies, others are likely to follow suit.
The premium increases are truly shocking – ranging from about 40 percent to well over 100 percent.
I have seen the impact of these increases on our clients, especially for those over age 70. Indeed, the highest COI rates occur as people approach and surpass expected mortality.
Here are two recent examples from our clients:
- A 94-year-old woman’s premium shot up 109 percent – from $6,954 to $14,560 – on her $500,000 Transamerica policy, which she purchased at age 72 for coverage to 102.
- A 76-year-old man’s premium leaped 81 percent – from $410,000 to $742,607 – on his $25 million William Penn/Banner policy, which he bought at age 69 for coverage to 95.
So why are these carriers – as well as AXA and Voya Financial – suddenly starting to raise these rates and what can be done?
First, some background. The majority of all permanent life insurance policies – indexed universal life, current assumption universal life, whole life and variable life – use projected COI to help determine pricing. Even guaranteed universal life contains a projected mortality component; it’s just baked into the carrier’s side of the risk equation.
If a carrier experiences worse-than-expected mortality results (that is, more insureds die than expected for a particular group of policies), it may pass the added costs along to the consumer. However, until this year, instances of raised COI rates were extremely rare. The industry recognized that such increases could jeopardize new sales by creating a public perception of “bait and switch” tactics. Now, some carriers have apparently decided to take that risk.
On the surface, these foreign-owned companies may appear to be responding to Solvency II, the new reserve requirements for European banks. But, in my conversations with these carriers, they cite other reasons: namely, low interest rates and poor mortality experience.
William Penn/Banner said the only way it could regain profitability for its permanent life business was to increase COI charges to all permanent policyholders. Based on what we’ve seen so far, the increases are dramatic.
Transamerica recently increased COI rates substantially for a large block of universal life policies written in the late 1990s in order to make that business more profitable. Due to the fallout from this announcement, the company now requires all re-proposals for these policies to be illustrated at the guaranteed mortality rate. Again, the outcome will be huge price increases.
AXA – the largest insurance company in the world – recently increased COI rates for a block of 1,600 universal life policies with particularly bad mortality experience. These policies also were selected for their pattern of premium payments. Specifically, their owners are paying pure COI rates instead of the full required premium. (With universal life and flexible premium life, policy owners can choose how much they pay each year, as long as there is cash in the policy.)
Voya Financial has indicated it has notified affected universal life policyholders but will not disclose the scope of its increases.
To make matters worse, many policyholders will suffer an added blow from the same stubbornly low interest rates that helped cause the problem. These low rates will compound customers’ premium funding difficulties, especially for those who cannot change coverage.
Affected customers should request an in-force ledger as soon as possible to determine the policy’s current, projected and guaranteed values. A full policy audit is highly recommended, to both identify problems and offer potential solutions. For clients who cannot change coverage due to health issues or age, alternate strategies such as reducing the face amount or surrendering paid-up additions must be found.
As advisors, we should be appalled at the cavalier attitude of these companies toward a matter that adversely affects so many older insureds, in particular.
Carriers clearly have other options, which protect rather than harm consumers. John Hancock, for instance, took a huge write-down in 2008-2009 that affected shareholders rather than clients. And since then, the company has been a prolific innovator of products and services that manage both interest and mortality risk. The latest example: John Hancock’s “Protection” series of policies, which offers a reduction of COI charges. This approach shows carriers can succeed by putting their clients’ needs above shareholder interests when necessary.
I believe we’re at a critical crossroads, and each of us in the advisor community must take action to safeguard both our clients and the entire life insurance industry. If this trend continues, the public will lose confidence in the industry as a whole, which would be devastating on many levels. I urge everyone involved to communicate their strong disapproval of these practices to the insurance carriers’ top leadership.
Ron Sussman is founder and chief executive officer of PolicyAudits.com and CPI Companies. Ron may be contacted at firstname.lastname@example.org.