The acting Superintendent of the New York State Department of Financial Services, reacting to almost “1,400” complaints from in-state consumers, recently issued an alert about universal life policies that provided insight for any trustee managing universal life policies. The alert focused on flexible premium universal life policies without secondary death benefit guarantees.
As pointed out in the publication, universal life is meant to be a “permanent” product, designed to “provide coverage for the policyholder’s entire life.” The alert highlighted the features of universal life that every trust-owned life insurance (TOLI) trustee should understand and some steps that should be followed by any policy owner, including trustees:
- “Premium payments, the policy’s existing cash value and ongoing interest credits (or, investment performance in the case of variable universal life insurance) are all used to cover the policy’s internal charges.”
- Those internal charges “increase each year as the insured gets older and can be very high in later years.”
- Most universal life policies (the major exception is guaranteed universal life (GUL)) “do not provide long-term guarantees of premium payments, cash value or benefits.”
- Since the policies do not have premium or death benefit guarantees, the policy will lapse when the cash value goes to zero. We have endured a decade of low interest rates and the original sales illustration often sets premium payments “based on assumptions about future interest rates or market performance” that did not occur.
- Since the “actual earnings of the policy are lower than originally assumed, you may have to make additional payments to keep your policy in effect.”
- Trustees “should be extra cautious with universal life insurance policies whose premiums and cash value projections are based on assumptions of future stock market performance, such as variable universal life insurance and indexed universal life insurance, as these policies will be more volatile.”
- “Owners of universal life insurance policies must check their policies often because changes in interest rates, policy expenses and the timing of premium payments will impact” how long the policy will stay in force.
Universal life is a very flexible policy, but that flexibility comes with a reduction in policy guarantees. These policies must be monitored every year to make sure that they stay on track and if off track, must be dealt with sooner rather than later. Life insurance policy issues do not resolve themselves, and over time the problems grow larger. Policy cash value allowed to dissipate will lead to ballooning future carrying costs because as the alert points out – the charges in the policy increase as the insured ages. This is why a prudent trustee tracks policies yearly and deals with policy issues well out in the future – alerting the grantor (and beneficiaries, if need be) to any problems well before they occur.
The TOLI trustee who does not follow this guidance may wind up with angry clients, or worse, potential litigation for policy mismanagement.
The NY DOI and life insurance associations should advocate for a change in tax law to allow UL policies with guideline limts to be funded as permanent life insurance. Underfunded UL policies often get to the point where no more premiums are allowed. The cash value has to be stripped down to zero and then ART rates are allowed, but are not practical as the insured often is in his or her 80’s. A solution would be to allow a policy to change to the CVAT rule or to recalculate guidelines based on current cash value. Perhaps these changes could be allowed through policy amendments and a change similar to an internal exchange.
NAIC and NY DOI enable and encourage the life insurance industry to provide consumers and agents with an I-Pad like device having the ability to vary the assumptions used in a visual illustration enabling the agent and client to see the effect on policy capital as the inputs are changed.
Such a tool would eliminate the need for the mind-numbing rows of numbers of paper illustrations, that do not promote understanding although the NAIC would probably still require them.
Agent and consumer education would come from allowing them to instantly create a visual change in the capital trajectory by adjusting the inputs. They would quickly see on an initial and ongoing basis the effect on policy when the insurance company changed any of the non-guaranteed elements within contractual parameters, as is their right.
Consumers would also see the impact of their behavior on the trajectory of policy capital, up and down, as they exercise their rights to increase or decrease premium or face amount. Consumers would be able to re-determine what they feel is a prudent return on capital expectations.
Such a tool will provide for prudent purchase decisions and prudent ongoing policy management decisions and be the most important, most frequently used element of Rule 498A.
In her speech on November 8, 2018, Dalia Blass, the Director of the SEC Division of Investment Management talked about allowing users to efficiently analyze and compare information about variable contracts, including, most importantly, their costs. Let us hope this is one of the tools the SEC will encourage the life insurance industry to build.
I/We recommend the SEC address the misleading NAIC required Illustration issue and seek replacement or a supplemental educational tool such as that recommended above.