In the summer of 2017 we posted a blog about another Transamerica cost of insurance (COI) rate increase affecting Ultra 115 and TransSurvivorship products purchased in 1998-99. We anticipated that the increases would be around 58%—a hefty raise. What we are seeing now could easily surpass that.
We are now beginning to receive notices of monthly deduction rate increases for some policies. Some of the policies are hit with a level 47% increase. Others, according to the notices will increase 39% on the next anniversary date, then in addition, the carrier anticipates increasing the COI by that same amount (39%) the next year and the year after. The increases are “compound” and over-and-above the “customary increases associated with age.” After the three-year period the increase percentage remains level.
A three-year compounded annual 39% increase is dramatic, and the carrier admits the increase “may be a significant consideration” for the policyholder, while laying out the typical policy holder options: retaining the current death benefit and paying the higher carrying cost, reducing the death benefit to lower the cost, surrendering the policy for cash value or reaching out to the carrier for other options. In the past we have found that some Transamerica UL contracts do offer a reduced paid up whole life policy for some policy holders.
Transamerica is increasing the rates based on “current expectations” about “future costs,” and though “future costs of providing coverage are subject to change over time,” they believe that “the second and third rate increases specified . . . are necessary.”
What does an increase like that look like? I asked our team in New York City to look at an illustration for one of the policies affected by the increase.
First, an explanation. Carrier COI charges are computed on a per thousand basis on the net amount at risk, defined as the difference between the death benefit and the cash value of the policy. For example, if a level death benefit policy has a benefit of $1 million and a cash value of $200,000, COI is only charged on $800,000 ($1 million minus $200,000). Why? Because if you die, you do not get the cash value—the carrier keeps it, you get the death benefit only. Therefore, their risk is the difference between the two.
Note: Some policies can be designed with an increasing, not level, death benefit, which increases the amount your heirs receive (and the cost of the policy).
Our NYC team provided a cost increase analysis for a policy in our portfolio. As expected, the cost increase in the first year was 39%, from $5.56 per thousand dollars net amount at risk per month to $7.73. Assuming a policy had net amount at risk of $800,000, as above, the pre-COI increase monthly charge in the next year (year 1) would be $4,448 ($5.56 x $800,000 / 1,000). Make sense?
After the COI increase, the monthly charge would be $6,183 ($7.73 x $800,000 / 1,000), the 39% jump.
Skip down to the third year, which assumes the compounded 39% increase each year. The pre-COI monthly charge would have been $5,642, but after three years of compounded increases, the monthly deduction charge rises to $15,161, a 169% increase. In this scenario, the approximate annual carrying cost for the policy go from $67k to $182k.
From the fourth year on the percentage increase remains a level 168.72% over the previous rates. The carrying costs above are not the exact numbers that would occur—they could get worse, if the policy’s cash value drops (and the net amount at risk increases). These are some of the largest cost increases we have seen to date from any carrier.
While we hoped the COI increases would slow down or even stop with interest rates rising, this latest increase tells us that may not be the case.
Special thanks to Frank Tomasello and Mike Irey in our NYC office for their contribution to this posting.