Consumer group calls on life insurers to improve flexible premium policy practices

By Brooke Lacey

The Life Insurance Consumer Advocacy Center (LICAC) is asking life insurance companies and agents to improve communication and transparency practices regarding flexible premium policies.

Flexible premium policies are part of universal life policies. Regulations require that whatever a consumer pays into a policy be referred to as a ‘premium,’ regardless of how the amount was determined or whether it will be enough to maintain the policy for the long term. Many consumers who hold these flexible premium policies are led to believe the premiums they pay will be sufficient to sustain the policy until the death of the insured. They are unaware of how flexible premiums work and are often surprised when, after paying premiums faithfully for many years, they are told by the insurance company that their policy will lapse if premiums are not increased, sometimes by large amounts.

Unlike many policies, universal life insurance policies do not have a guaranteed, carrier-specified premium, and policy owners pay the amount listed on the policy illustration at the time of purchase. The amount is based on a snapshot taken at the time of purchase, based on the policy owner’s age, health, policy credit value, or other factors. But the amount needed to sustain the policy can change, often without consumer knowledge.

“Consumers may not be aware or remember that they need to ask their carrier or agent if their premium increased. If not, they might get a notification 30 years down the road that they need to pay a large amount or lose coverage,” says Dick Weber, president and chief consultant for The Ethical Edge, and the LICAC's Treasurer.

Premium increase notification

Weber notes that with a universal life policy, you may pay less initially but that amount may need to change over time based on the crediting rates and market fluctuations. Today, most carriers do not automatically let consumers know they need to increase the amount in order the fund the policy.

Weber, who has been in the business for 59 years, says one of the issues is that consumers and agents may not be in as close contact as they have been in the past, -- either because the agents leave the business or the consumers have a ‘set it and forget it’ attitude toward life insurance.

The LICAC says there is a need to improve consumer understanding of flexible premiums through better communication, transparency, and annual disclosures. Consumers should be repeatedly informed, in various contexts, that paying a flexible premium does not guarantee the policy will remain in force. From the initial purchase point to annual disclosures, consumers need to be reminded of the reality of their flexible premium policy, which is that just because you pay the insurer’s premium billing when due does not mean that the policy will stay in force.

“Consumers don’t see their life insurance policy as an asset to be managed. They typically put it in a drawer and forget about it. Similar to a retirement savings account, where you need to monitor it to make sure you have enough money saved for your retirement, those with a flexible premium policy need to make sure they have enough money to last until their death,” Weber says.

Insurers implement strategies to aid consumers

Some insurers are already implementing strategies to help consumers. For example, John Hancock offers a Life Track option for its flexible premium policies. The Life Track disclosure outlines the policyholder’s original goals and the assumptions underlying them. Each year, it gives the policyholder the option to instruct the insurer to automatically increase the premium if needed to meet the policyholder’s initial objectives

“A flexible premium life insurance policy, like most universal life policies, can offer significant benefits to consumers. However, it can also lead to false expectations among those who do not understand what a flexible premium means,” Brian Brosnahan, executive director of LICAC, said in a statement. “LICAC is calling for changes to improve transparency and communication, so consumers are aware of what they are getting into with these policies. We need to end the all-too-common scenario where an older policyholder is shocked to find that after faithfully paying their premium for many years, the policy is about to lapse and cannot be continued without large premium increases.”

To help consumers and financial professionals understand the risk, the LICAC put together a white paper on flexible premium policies.

About the Life Insurance Consumer Advocacy Center: The Life Insurance Consumer Advocacy Center is a nonprofit social service organization that advocates for consumers of life insurance and works for the passage of laws and regulations that protect life insurance consumers.