(Editor's note: This is a corrected version of an article that was posted November 16. In that original article, Genworth was erroneously listed as one of the carriers that had raised the cost of insurance on older blocks of indexed universal life.)
By Ron Sussman
In my Nov. 6 article, I addressed the issue of life insurance carriers raising cost of insurance (COI) rates to egregious levels. Since I wrote that article, the number of carriers raising rates on older blocks of business has increased to five, with Prudential PLC (Jackson National’s parent) joining the list.
It appears that this trend could accelerate, at least until interest rates rise enough to cover the financial shortfall. Even then, it is unclear whether these carriers will re-adjust the rates downward, or continue them at their current levels. Or maybe increase them again?
What’s interesting about these COI increases is that some of these carriers are on both sides of the issue. Consider the following:
- While Banner/William Penn increased monthly COI deductions across the board for owners of universal life policies, it concurrently adjusted term insurance rates downward to remain competitive in that space. If term insurance is a pure expression of mortality experience, you would expect those rates to rise. And while all carriers view profitability from the perspective of segregated “blocks” of business and it is entirely reasonable to adjust for negative results, the argument that “mortality” is the issue seems groundless.
- Carriers recently have announced increases to their pricing for annuity riders that provide lifetime payments and benefits such as long-term care. The reason for the increase is an improvement in mortality based on the most recent actuarial tables. So at the same time carriers are increasing the cost of mortality for permanent life insurance policies, they are implicitly acknowledging that people are living longer and therefore need to pay more for annuity benefits riders.
From the perspective of an insurance carrier, these subtle actuarial nuances make the examples incomparable, yet the buying public cannot make that distinction.
What your clients see is that insurance carriers cannot be trusted. And if this issue gets the public airing it deserves, you can expect to face the prospect of clients who are even more suspicious of life insurance products, more cynical about the industry and significantly less trustful of its representatives. Make no mistake about it, this is a bad result that will reverberate for many years to come.
It seems odd that carriers could be so far under water with these older policies that they are willing to risk any goodwill they might have with the buying public for short-term boosts to corporate return on investment. But that is exactly where we stand right now. We are on the precipice of a major change in the way life insurance is perceived by clients. Especially if this issue breaks out in the national press, as I believe it will.
Insurance carriers will bear the brunt of the initial public relations debacle, but it’s disingenuous to think that agents had no hand in this. I think it’s time that we acknowledge our role as enablers. Like it or not, we must take responsibility for the endless and often cavalier spreadsheeting and commoditizing of life insurance products.
A prospective client looking at a spreadsheet of product possibilities is going to gravitate toward the lowest price every time. Most unfortunately, the industry has become conspicuously reliant on this type of misleading comparison.
Further, we know that funding universal life, indexed life or any other flexible premium product for zero cash value at 100 or earlier (most egregiously to some arbitrary expected mortality date) is a fool’s game. And yet this is one of the most widely used tactics to illustrate lower expected costs of coverage.
Here are some basic facts that we all need to acknowledge:
- Just because you can illustrate an outcome does not mean that outcome will be achieved.
- Policies need to be overfunded to make room for future changes in every variable cost component.
- Insurance companies make money by investing premiums. Therefore, underfunded policies, or policies on which the owner is paying the pure COI cost, are the most vulnerable to future adjustments.
- Insurance companies aren’t disclosing their financial or product pricing issues with their distribution partners. Instead, we are always playing catch-up with bad news.
- All permanent life insurance policies contain a mortality component, even whole life.
- The buying public will love you when you are the lowest-cost provider at inception, but run screaming from you when you abuse their trust.
Maybe we need to re-think our attitude about selling insurance? Maybe we need a push toward totally guaranteed benefits? As much as the carriers hate guaranteed universal life, we should be embracing it for its pure protection value. And by that, I mean protection for both client and agent from future insurance carrier performance disappointments.
The life insurance industry is at a precarious inflection point. The actions carriers have taken to protect profits are the result of a combination of factors that include distribution partner misuse of illustration systems and transactional market behavior that is in direct conflict with the realities of life insurance policy construction and pricing.
We all should be advising our clients to at least slightly over-fund any non-guaranteed products. And we should all be vigilant with the policies we sell. Continuously monitor policy and carrier performance. It is the only way to limit the downside of carrier misbehavior and show policy owners that we have their best interests at heart.
We ignore this advice at our own peril.
Ron Sussman is founder and chief executive officer of PolicyAudits.com and CPI Companies. Ron may be contacted at [email protected].