Over the last several years, we have posted several entries dealing with the cost of insurance (COI) increases we have seen in Current Assumption Universal life (CAUL) policies. Starting back in 2015, we were among the first to bring notice on this issue. This week, our Iowa office received yet another COI notice from a carrier joining the ranks – Midland National Life Insurance Company.
In the May 2022 IMPORTANT: NOTICE OF CHANGE IN NONGUARANTEED ELEMENTS OF YOUR POLICY letter, Midland National states:
This summary notice is intended to inform you that Midland National Life Insurance Company (“Midland National”) will change the non-guaranteed scale of cost-of-insurance (COI) rates for your Policy. Enclosed with this notice is a chart of the currently effective scale of cost-of-insurance rates for your Policy and the new scale of cost-of-insurance rates for your Policy. The new scale will be implemented starting on your next policy anniversary following September 15, 2022. Also included are the guaranteed maximum cost-of-insurance rates set forth in your Policy.
As to why this increase is taking place, Midland National states:
Midland National does not take lightly the decision to change the scale of COI rates for your Policy. This decision was made after careful analysis of the insurance company’s expectations of the future costs of providing benefits under your Policy. These revisions are being made in light of changes in projected results using actuarial assumptions that Midland National is making now with respect to future events. Some policy owners may experience an immediate decrease in their COI rateswhile others will experience an increase. However, in all cases, the COI rates under the new scales are higher than under the old scale at some future date. If your Policy remains in force beyond that time, this may lead to your Policy lapsing if you continue to pay premiums at the same level and at the same frequency that you do now.
For those that may not fully grasp how this effects a policy, let’s look at the universal life (UL) policy that received the notice.
Issued in 1997, this Midland National universal life policy (Security 2006 UL) provides a level death benefit of $1,500,000.00 with scheduled annual premiums of $7,080.00. Based on the premiums paid to date and assuming pre-COI increase non-guaranteed assumptions as of the February 2022 anniversary, the policy was projected to continue to maturity age 100 with NO ADDITIONAL OUT OF POCKET PREMIUMS. The cash value in the policy was projected to be sufficient to maintain the policy for life with no additional out of pocket premiums needed. This female insured is currently 61.
Now let’s look at the post-COI increase projection assuming the new increased rates. Based on the current premium outlay of $0.00 annual, the policy is now projected to continue to the insured’s age 76 and lapse with no value without additional premium. You read that correctly, the non-guaranteed duration just decreased 24 years with this new COI increase.
To get a look at the rates and percentage changes, here is the TABLE OF CHANGES TO MONTHLY COST OF INSURANE RATES PER $1,000 provided by Midland National for this policy:
So what are your options?
- Take no action. Accumulation value will decrease, additional premiums will be required at some point to maintain the policy or it may lapse with no value.
- Pay additional premium now. Substantial premium increase to maintain pre-COI increase duration.
- Reduce the face value of your policy. Additional premium may still be required with less death benefit.
- Surrender your policy for the cash surrender value. Immediate loss of all death benefit, possible taxable gain.
- Convert your policy to paid up insurance (if available). Decreased death benefit, no additional premiums required.
- Replace the policy, if feasible. Underwriting required.
Whatever the decision, it is not much solace to the grantors we work with that have been told to increase the gifts to their trust just to keep their policies in force. Managing life insurance policies has gotten much harder with the COI increases we have seen over the last several years with no signs of letting up.
We will continue to follow up on this COI increase with Midland National. Currently, the Midland National product affected is the Security 2006 UL but there may be more to come. We will continue to provide updates as they are available.