Industry Pressured To Find UL Policy Fix

By John Hilton

Pressure is growing on insurance regulators and carriers to address failing universal life insurance policies sold decades ago.

Even those who want the industry to step in are not sure what they can do. But one industry veteran said it’s an impending “public relations disaster” for the life insurance industry.

Industry activist Kim O’Brien became the latest to call on the National Association of Insurance Commissioners to intervene during a conference call this week. Iowa Insurance Commissioner Doug Ommen, who was chairing the Life and Annuities Committee meeting, agreed to meet with O’Brien to discuss the issues.

Universal life was a very popular product in the 1980s, when interest rates routinely hit double digits. The policies offer a savings account in addition to the life insurance components. Money deposited into the savings portion earned interest to help pay future costs while keeping premiums down.

And everything was all good until interest rates plummeted below 4 percent following the 2008 financial crisis. Furthermore, many UL policies permitted customers to pay lower payments, or skip a payment altogether, and borrow against the savings account.

The end result of this flawed concept is policyholders in their 80s and 90s are facing steep premium bills. Their only alternative is to surrender a prime retirement plan asset and be left with nothing to show for years of paying premiums.

“Policies are either lapsing, or they are reaching maturity with far less value than anticipated,” said Richard M. Weber, a longtime life insurance agent and executive.

The UL issue gained prominence when The Wall Street Journal published an extensive story Sept. 19 that included several stories of older Americans trapped by failing UL policies. The stories put human faces on the issue – an 85-year-old former teacher outside New York City, a 94-year-old former hospital billing clerk in North Carolina, and many others.

“It’s a significant problem for seniors,” Weber said. “These policies are weaker and they have less cash value because they’ve been drained of cash value to pay for higher expenses, which is a self-fulfilling negative spiral.

“There are a lot of issues and I would say the industry has not responded in a responsible way.”

‘Highly Limited’

Unlike O’Brien, however, Weber is not looking to regulators to address the UL crisis.

“I would urge the ACLI (American Council of Life Insurers) as a trade organization of carriers that they need to recognize this is a public relations disaster,” he said. “I think ACLI needs to convene its members and say ‘Hey, guys, we need to come up with a solution.’”

ACLI's ability “to engage on individual policyholder issues with individual life insurance companies is highly limited,” said spokesman Jack Dolan in an email.

Interest rates are the real culprit behind the policy failures, he added. ACLI continues to lobby the Federal Reserve on interest-rate policy, and supports NAIC efforts to strengthen standards to ensure consumers fully understand what life insurance they are buying, Dolan said.

“Companies have been updating old policies to ensure the sort of difficulties faced by people who purchased universal life insurance policies in the 1980s are not repeated,” he said.

Birny Birnbaum of the Center for Economic Justice is a ubiquitous presence representing consumers at NAIC meetings. A regulatory review of why the policies failed and what can be done to avoid a repeat scenario would be welcomed by the CEJ, said Birnbaum, executive director of the organization.

“It would be useful to look at the disclosures and illustrations used at the time of sale to see if the illustrations and disclosures informed or misled consumers,” he added.

By The Book

From the insurer standpoint, as noted by The Wall Street Journal report, everything was done by the book. Illustrations routinely showed customers fat returns of 11-12 percent, but interest rates matched those numbers during the 1980s.

While companies also showed and disclosed worst-case scenarios, customers either didn’t pay attention or didn’t understand.

The problems with UL date to the 1990s, when carriers reached settlements with customers over deceptive sales practices. Regulators followed by tightening illustration rules. Those customers who were confronted with rising premiums then were at least young enough to adjust and reset their retirement plans.

Current policyholders with high-payment burdens are a bad look for the industry, Weber said. LIMRA estimates that carriers sold between 2 million and 3 million UL policies during the 1980s and 1990s.

“My focus really is on credibility of an industry that has always had implicitly the trust of its customer base,” Weber said. “The credibility of a life insurance company is really, really important.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.