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.