In the past 6 months we have posted a number of blog entries concerning the rash of cost of insurance (COI) increases. One of the first carriers to alert policy owners to a COI increase was Transamerica. We reported back in September of 2015 about the Transamerica increase and the effect on a policy we reviewed (See: Transamerica Cost Increase Causes Premium to Maturity to More Than Double: A Case Study for Trustees).
In November we reported that Transamerica informed us that they would no longer run in-force ledgers based on “current assumptions” on some policies that were not subject to the price increase (See: Transamerica Now Making It Almost Impossible to Manage Their Life Insurance Policies). As we mentioned in that blog, Transamerica told us that after “annual illustration testing” of their in-force products, they would only illustrate “the guaranteed future interest rate and monthly deductions” on this specific group of policies going forward.
I happened to be involved in a review of a policy affected by that Transamerica announcement, and in the process of following up on that policy last week I found out that Transamerica was now able to run current illustrations on that policy. That is the good news.
The bad news is that the COI on that particular policy will increase approximately 100%, making the policy’s economic efficiency questionable.
To date, the highest increase we had seen for a Transamerica policy was approximately 40%. The chart on the right shows the pre- and post-increase COI for the policy, indicating the COI has essentially doubled. This particular policy is a Survivorship Universal Life policy issued in 2002. According to information I received, the policy owner will receive a letter alerting him or her to the COI increase 45 days prior to the anniversary date. The policy death benefit is currently just over $15.5M. The premium to maturity solve, assuming a level death benefit, was $400,000 prior to the increase. After the increase the same premium solve is $981,707, quite a hefty jump in premium cost.
We manage a number of policies that were affected by the Transamerica “guaranteed illustration” announcement. As of now we do not know if the others will be subject to this cost increase, but we are actively reviewing the situation, as this new increase will wreak havoc on the estate plans of a number of our grantor clients. We will be reporting back shortly.
Greetings,
Excellent reporting as usual.
I am endeavoring to assemble a condensed list of carriers and their activities relating to increasing COI’s, others spinning off their Life, Annuity, LTC business and simply outright sale/merger to other carriers. Is there any timeline by chance? I guess it would depend on how far back one wished to go!
Also, I heard in the wind (actually via SABRAS) that someone might actually buy the Phoenix Life book? Might this be the same type of outfit that bought the Lincoln Benefit Life book (woe be the policyholders.)
Thanks,
Bill
Bill Miller
Miller & Associates
Wichita, Kansas
316-204-7998
millbilljr@gmail.com
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Bill: On our website under Educations/Past Webinars is a Handbook for a Webinar we did on COI Increase. It may have some of the info you are looking for. I have not heard anything about a Phoenix sale. Take care. THANKS
As the central banks ponder the “tool of last resort”, negative int rates, doesn’t that just fuel the COI increase train, given the guaranteed min int on some policies is high?
This used to be a 3rd rail tactic that no one wanted to touch……yet they are now licking a live circuit.
Donald: No doubt that interest rates are driving this and lower rates will only exacerbate the issue, but there are also issues with reserve requirements, bad underwriting and persistency. It will be interesting to see it all play out. We now have hundreds of policies we manage that are affected and I am certainly hoping it does not get worse. Thanks for the comment.
My question would be, why did the agent sell this client a second to die policy without a guaranteed premium? This is especially a problem because it covers two lives and one of the parties could end up living a long time. Instead they sold them what looks to be a traditional second to die UL without a Guaranteed Premium and this opportunity for failure built into it. I wasn’t there to see why this was sold this way but it would appear because they sold the wrong product that this is as much the agent’s fault as it is the insurance company’s and the economy’s.
Because the guaranteed rates are VASTLY more expensive for the client, and the agent would more than likely not be able to close if they weren’t able to demonstrate a cost-effective way for the client to maintain coverage. It’s a path of least resistance, and in the competitive world of insurance sales, you better believe the agent down the street selling for another carrier is going to show the client the current rate projections.
Is that wrong? Traditionally, not so much-provided interest rates remain stable and if the insurance company remains aligned with their original mortality deduction calculations. But neither one of those things happened, so here we are.
Let me be clear: I agree the agent shoulders some responsibility in this and much of these recent cost increases could have been minimized if they had done an honest needs analysis and been very clear about the volatility of UL products; this type of insurance has had quite a checkered past-particularly with Trans.
With that said, you would think that they would have been very sensitive to the kind of impact this decision would have had with clients given their prior struggles with UL and done more to pivot to other kinds of value-added products like term instead of riding the interest rate declines over the years.
Instead, Trans’ focus on UL products with high-end clients will be a major branding roadblock with potential customers going forward. And the leadership of Trans has only themselves to blame for that.
[…] It is interesting to note that the initial plaintiffs listed in this suit were subject to an approximately 38% rise in the COI in their policy, a $250,000 “Trans Max” universal life policy issued in December 1990. The last policy that I reviewed from Transamerica was subject to a COI increase of almost 100%. (See: Transamerica Cost Of Insurance Increases: Is the Other Shoe Now Dropping? ) […]
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