Back in the spring, we reported on the Lincoln National “Enhanced Cash Surrender Value” offer the carrier began making to a select group of policyholders. These unsolicited offers would allow policyholders to receive an amount higher than the current cash surrender value to return their policies to the carrier.
As we noted, the offers were similar to some made on mispriced variable annuities after the 2008-09 financial crisis. Those annuities had guaranteed minimum income benefits that the carriers felt were too rich in the current investment climate. The Lincoln offer, however, is the first enriched buyback offer we have seen for life insurance policies.
Life Insurance Settlement Association (LISA), a trade association that promotes the rights of policyholders selling their policies in the secondary market, is now challenging this enhanced offer. In a letter addressed to the Commissioner of the Florida Office of Insurance Regulation, LISA, through its attorney, alleges that the enhanced cash value offer violates a “slew of consumer protection laws,” citing five separate Florida statutes, and accuses the carrier of “acting as a life settlement provider without the required license.”
According to the LISA letter, the offer was made on 5,300 Lincoln Life Guarantee SUL 2009 policies. These survivorship policies, which pay out after the second insured dies, are often used in trust-owned life insurance (TOLI) trusts since estate taxes for a married couple are typically paid at the second death.
We oversee 81 policies that have received offers – so far. While in both the offer letters and the FAQ brochure provided by Lincoln, the carrier notes that their “records indicate” the policyholder has “stopped making regular premium payments,” for a number of our policies, premiums have been paid to date, some each year since policy issue. The carrier suggests that “missing premium payments can be an indication that your insurance needs may have changed” and asks the policyholder to “consider whether you still want or need the death benefit protection provided by this policy,” or whether the Lincoln enhanced offer “is more important to you than your need to leave a death benefit to your beneficiaries.”
LISA notes that in an attempt to “entice” policy owners to accept their offer Lincoln is using “many of the arguments made by life settlement providers in their marketing,” pressuring “the consumer to act” by providing the option for “a limited time only.” According to the LISA letter, Lincoln seeks “to entice agents to solicit their clients” to take advantage of the offer “by holding out the possibility of additional commissions” if the client uses the proceeds to purchase a new Lincoln product, noting that “an internal replacement into any new policy or contract will be considered new business and agents will be compensated using the same rate schedule used for new premium.”
A life settlement also pays a commission to those who facilitate the transaction. Whether a life settlement would be more beneficial for the policyholder is probably not contingent on commissions paid but the facts and circumstances around each policy, specifically the health of the policy and the insured. Lincoln is offering to pay a premium of between 35% and 200% above the cash surrender value for the policies we manage, without having any knowledge of the insured’s current health. In a life settlement transaction, at least one life expectancy (LE) report is obtained, providing the investor with insight as to the health of the insured, which greatly affects the price offered.
Why would Lincoln do this? In our portfolio of 81 policies, there is $292 million of death benefit. Lincoln is offering an aggregate amount of $41 million to re-purchase the policies. The 81 policies have a total surrender value of $25 million, but without surrender charges, the cash values would be $31 million. We have found that, in our portfolio, the average offer is slightly above the average premium paid. Lincoln is not paying much more than it has collected (and invested) since the policies were issued. Lincoln is on record as saying that it is making the offer because for policies surrendered, they would “no longer be responsible for the death benefit on the policy.” This would enable them to release “financial reserves and redeployment of the funds for a different use.”
The life insurance industry is struggling, and carriers are looking for alternative avenues to use their capital more profitably. This will have repercussions, and in our next blog, we will discuss Voya’s decision to stop issuing life insurance and how it highlights changes in both the life insurance market in general and trust-owned life insurance (TOLI) in particular.
LISA is asking for the Florida Office of Insurance Regulation to investigate Lincoln’s Enhanced Cash Surrender Value Option, and to “take necessary enforcement action if, as we believe you will, you conclude that this program violates Florida law.” As of today, none of our clients have taken Lincoln up on their offer, but almost all have until the end of March 2019 to do so.
We will report back with any updates.