First John Hancock Cost of Insurance (COI) Increase Letters Arrive

In February of 2017 we reported John Hancock had placed limitations on inforce ledgers for certain Performance UL policies.  A year later, in February of this year, we wrote that The Life Settlements Report, a trade publication, reported that John Hancock had voluntarily notified the state of New York that it would be raising the cost of insurance (COI) on 1,700 Performance UL policies.

Today, our New York City office received the first official COI increase announcement from the carrier.  The letter, dated May 7th, noted that the carriers’ “expectation of future experience has changed” and for that policy, the cost increase would occur on the next policy anniversary date.

The carrier provided several “options to manage the increase,” including; increasing the premium to keep the current death benefit in force, reducing the death benefit to “keep the current premiums the same,” or maintaining both “current death benefit and premium payment,” though if that option were chosen, “your policy will not remain inforce as originally projected.”

The carrier also offered the option to surrender the policy, though they “strongly encourage” policy holders “to consider the value of your policy and the goals you established when you purchased it” before taking that course.

The carrier provided an 800 number to contact “dedicated service representatives” for assistance and “personalized information and illustrations specific to your policy,” and noted they are “committed to working with” policy holders to choose an option that “best meets their needs.”

We are not sure of the size of the COI increase. According to a John Hancock representative contacted by our New York City office, the amount of the increase will vary by policy.   The representative also noted that roughly 4,000 Performance UL policies were evaluated and approximately 1,400 will be affected by the increase, though we cannot officially verify that.

It appears that inforce illustrations for the policies affected will begin to flow in the next few weeks, and as they are received and analyzed we will report back on our findings.

Carrier Offers Life Policy Buyback – Another Trustee Decision Dilemma

Lincoln National is offering some policy holders the opportunity to receive an “Enhanced Cash Surrender Value” if they surrender their life insurance policies within a specific time frame.  We began to receive letters from the carrier a few weeks back, along with a Frequently Asked Questions (FAQ) brochure explaining the offer.

The offer is not unlike offers extended to variable annuity policy holders after the 2008-09 financial crisis. At that time, holders of variable annuities with guaranteed minimum income benefits (GMIB), typically in the 6-7% range, were offered additional incentives over and above their annuity’s value to surrender the contracts.   Those offers continue today with two carriers in the last few months reportedly “enticing” consumers to surrender their annuity “in exchange for some incentive such as a cash lump sum or another product from the insurer.” In fact, variable annuity buyout offers have occurred “among at least one or two carriers every year for the past four to five years.” (1)

According to a report by Moody’s, “companies selling VA’s with guarantees misestimated and underpriced” the product. The mistake “forced insurers to take significant, unexpected earnings charges and write-downs.” (2)

Lincoln’s offer is the first enriched buyback offer we have seen for life insurance policies. Some policies offer a contractual return of premium or enhanced value to surrender a policy at specified points in the future, but we have never received an unsolicited offer.

According to information from the carrier’s FAQ, the offer is being extended to those policy holders who have “stopped making regular payments” on their policy, and it is determined by a formula based on policy “cash surrender value, the length of time…[the]policy would remain active without future premium payments, and an actuarial calculation incorporating mortality and interest assumptions.”

Like carriers offering variable annuity buybacks, Lincoln will be helped by releasing reserves tied to the policies. According to the FAQ, “Lincoln must hold financial reserves in accordance with statutory and accounting regulations.” If a policy owner surrenders the policy, “Lincoln would no longer be responsible for the death benefit on the policy, allowing the release of these financial reserves and redeployment of the funds for a different use. This option could be mutually beneficial to both you and Lincoln.”

So, does it even make sense to surrender a life insurance policy – even if receiving an enhanced value? It depends on specific facts and circumstances, like all policy decisions. For these policies, no out-of-pocket premium is being paid. How long will the policy last without additional premium costs? What is the health of the insured? Will the policy last past the life expectancy of the insured without additional cash contributions? If not, how much more cash would have to be put in for the policy to run to life expectancy? Should a life expectancy report be obtained to provide another data point? These are some of the questions that must be asked before a decision is made. Lincoln believes that buying the policy back for an enhanced value makes economic sense for them. If you are a trustee, you will have to decide whether it makes sense for the trust and document the prudent decision-making process to reach your conclusion. It is all part of a trustee’s job.

 

  1. Insurers Still Grappling with Costly Variable-Annuity Promises, April 13, 2018, Greg Iacurci, http://www.investmentnews.com
  2. Moody’s Investors Service, Unpredictable Policyholder Behavior Challenges US Life Insurers’ Variable Annuity Business, Global Credit Research, June 24, 2013

Lawsuit Filed Against Phoenix for 2017 Cost of Insurance (COI) Increase

On April 19th, a class action lawsuit was brought in the Southern District of New York against PHL Variable Life Insurance Company (Phoenix) for subjecting policyholders “to an unlawful and excessive cost of insurance (“COI”) increase” …“in violation of their insurance policies.” We reported on the cost increase in August of last year.

A 2010-11 COI increase resulted in a 2015 settlement against Phoenix for more than “$130 million in monetary and non-monetary benefits” and the carrier agreed not to increase the COI on those policies until after December 31, 2020.  Some of the policies affected by the 2017 increase were policies that were part of that lawsuit.

Per the current lawsuit, the 2017 increase is occurring in three stages: first, certain Accumulator (I, II, III, and IV) and Estate Legacy Universal Life universal life policies not part of the prior settlement class would have increases occur on their first anniversary date after November 2017, second, those policies part of the settlement would see increases after December 31, 2020 and third, for “other policy owners, Phoenix will impose the 2017 COI Increase on December 31, 2020 but then rebate to those policyholders the amount of the increase.” The suit contends that this last stage represents a “special side deal” with “institutional investors” that violates the “uniformity requirement” of the contract. The suit also alleges the increase discriminates “within a class of insureds based on whether they were subjected to the 2010 and 2011 increases and the terms of various side agreements reached with Phoenix.”

In 2017 we received letters from Phoenix that announced there would be an “overall increase to cost of insurance rates, as well as progressive increases…beginning when an insured reaches age 71 through age 85.”  The lawsuit claims that the increases are “unlawful” since any changes must be “on a uniform basis for all insureds in the same class.” According to the lawsuit, the policies “do not have a distinct age 71 to 85 class, nor do they have separate classes for each of age 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, and 85. The 2017 COI Increase therefore violates the contractual uniformity requirement”…since… “policyholders aged 71 and older are being targeted and treated differently than policyholders younger than 71” and “policyholders aged 72 and older are being progressively targeted each year as they age and discriminated against relative to younger policyholders.”

The lawsuit contends the “2017 COI Increase is not based on the enumerated factors” that are mandated in the policies – “mortality, persistency, investment earnings, and expenses.” For example, mortality rates, “have improved steadily each year” and “people are living longer than when the products were process and issued.” Some of the policies subject to the increase “were issued as recently as 2014,” and the suit contends that “nothing that has changed between 2014 and 2017 that would merit a new COI rate increase.” According to the filing, “the increase was not calculated through an actuarially reasonable methodology, and was designed to induce lapses, all in violation of the policies and the implied covenant of good faith and fair dealing.”

The complaint notes that the increase was not implemented in New York state “because Phoenix NY is regulated by the New York Department of Financial Services (“NYDFS”), which has recently become an active regulator in monitoring unlawful COI increases” and contends that “the only possible explanation” was that the carrier “knew that the COI increase was not legally or actuarially justifiable and that NYDFS would find it to be unlawful.” The fact that the carrier exempted New York policyholders from the increase was “another violation of the prohibition against intra-class discrimination.”

While the increase did not occur in New York, the case was filed in New York. The complaint noted that Phoenix was acquired by Nassau Re in 2016 and though it has a statutory home in Connecticut the senior management works out of New York City, the company address is listed there, and “all major decisions, including the decision to raise COI rates on the Subject Policies, are made from Nassau Re’s New York City headquarters.”

The suit asks the court to declare that the 2017 increase was “unlawful” and “constituted a material anticipatory breach of the Subject Policies.” It requests the court order Phoenix to “reinstate any lapsed or surrendered policies” and provide the plaintiffs with “compensatory damages, consequential damages, restitution, disgorgement, and any other relief permitted by law or equity.”

We will be following the court case and will report back as the proceedings unfold.

For a copy of the 28-page lawsuit, please email mbrohawn@itm21st.com

New Transamerica Cost of Insurance Increase Is One of the Largest Yet

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 perCOI 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.  

Shared Characteristics of Long-Term Care and Life Insurance Cost Increases

Sally Wylie, a retiree living on an island in Maine, was stunned when her long-term care (LTC) policy premium almost doubled. According to the Wall Street Journal article that recounted her dilemma, the one-time learning specialist took on part-time work to help with the finances, and she and her husband cut back on expenses to afford the premium for the policy that was purchased to be their safety net (1).

Permanent life insurance has experienced similar, large cost increases. Because of articles we published in the last few years on this subject, we have received more than one hundred emails from consumers stung by the cost of insurance (COI) increase on their life policies. Some people, like Sally and her husband, scrimp in other areas to pay the increased policy costs. Others have simply dropped coverage, which I suspect many long-term care policyholders have also done.

The cost increase dilemma facing life and long-term care policyholders stems from the decade-long, historic low-interest rate environment. Insurance carriers take in premiums, invest them and (hopefully) generate enough Moodysinvestment income to pay out future benefits and still make a profit. The general accounts of most insurers are invested primarily in high-grade corporate bonds. As the chart to the right, which shows the bond yield for Moody’s Seasoned Aaa Corporate Bonds, points out, bond rates have been slipping generally downward for the last 35 years. And since the market crash of ‘08-’09, interest rates have dropped to never-before-seen lows.

John Hancock, the insurer of the federal government’s employee long-term care program, raised premiums dramatically after interest rates that were expected to rise after securing the government contract in 2009 instead dropped by about 33% (2).

Current assumption universal life insurance carriers profit from what is called the interest rate spread. They invest at 6%, credit the policy 4% and keep 2% as “profit.” One carrier, among the first to raise COI rates, was contractually obligated to credit their policies 5.5%, even while their investment earnings were less than 5%. No profit there.

Most LTC and life insurance policies experiencing the cost increase are older policies written in the ‘high’ interest years of the ‘80s and ‘90s, another characteristic these policy increases share. They both impact older aged policy holders who have paid premiums for 20 or 30 years. Many retirees, who have reduced income due to low interest rates in conservative investments, now face higher costs driven by those same low interest rates. And for most older life and LTC policy holders, there is no alternative. They are typically too old or unhealthy to obtain more economical coverage.

Another similarity is that carriers are providing both life and LTC policyholders, as a principal option, the ability to maintain the same premium cost by lowering the benefit that would be paid, reducing carrier liability while still retaining their cash flow. In every life insurance COI increase notice we have received, reduction of death benefit to retain current carrying cost is proposed as a policyholder choice. And LTC carriers are leading with the same benefit-reduction option.

Many policyholders—both LTC and life—are simply abandoning their policies after years of premium payments, potentially risking their retirement security. A recent article in the Wall Street Journal lamented the fact that use of private retirement insurance products is dropping, with the burden being shifted to public plans (3). The needs of a widow whose husband dies without life insurance or a couple incurring large LTC bills without resources will shift to and drain the public system going forward.

As the article pointed out, “retirement security isn’t just about having a nest egg, but…also about having options for turning that saving into security.” For some who have seen the costs of their life insurance and LTC policies rise, some of their retirement security may be slipping away.

While we focus on life insurance, the ITM TwentyFirst University is offering a session on long-term care insurance with expert Kim Natovitz on Tuesday, April 24 at 2 p.m. Eastern Time. The session provides one hour of free continuing education for Certified Financial Planners and Certified Trust and Financial Advisors. To sign up, click here.

 

  1. “Millions Bought Insurance to Cover Retirement Health Costs. Now They Face an Awful Choice.” Leslie Scism, Wall Street Journal, January 17, 2017.
  2. “Another Big Long-Term Care Insurance Premium Hike.” Howard Gleckman, Forbes Magazine, August 1, 2016.
  3. “Retirement Insurance Products Are Disappearing. And That’s Dangerous.” Benjamin Harris, Wall Street Journal, April 13, 2018.

 

How About Just Doing the Right Thing?

During an ITM TwentyFirst University webinar on trustee liability, I described a replacement case that came into our remediation department. A grantor with a whole life contract in his trust had decided to stop gifting. His agent advised him to complete a 1035 exchange of the cash value from the existing policy into a new current assumption policy. The exchange, with no other premium, would carry the new policy out past life expectancy on a non-guaranteed basis but not to policy maturity. The death benefit in the trust would be lowered, but the grantor was comfortable with this, as the focus was on limiting the costs associated with the trust. Our remediation team notified the trustee that the death benefit in the existing policy could be guaranteed to maturity by requesting a reduced paid-up policy with the existing carrier, which would contractually guarantee the existing policy’s death benefit with no additional premium. The death benefit would be lowered but would still provide $900,000 more in death benefit than the new non-guaranteed policy was proposing.

I was reminded of the case while reading an article in the Wall Street Journal explaining that the Fifth Circuit Court had “struck down” the Labor Department’s fiduciary rule, stating that the department “overreached” by requiring those who handle retirement accounts to act in the “clients’ best interest” and asserting that the “rule is unreasonable” (1). I understand the industry fight against this law. They are afraid that it will mire them in lawsuits and make the sale of some products much harder in the retirement plan community. The law as it stands only affects retirement accounts, but states are pushing to have “best interests” laws apply to non-qualified annuities and even life insurance (2), which would certainly increase the number of lawsuits.

What ever happened to just doing the right thing? In the case above, had the trustee allowed the replacement, the agent would have made approximately $20 thousand, depending on his brokerage arrangement, but the grantor’s beneficiaries would have lost almost a million dollars. Believe me, many trustees without specialized skills are allowing these cases to slip through.

At ITM TwentyFirst, we service trustees bound by fiduciary duty, and our new affiliated company, Life Insurance Trust Company, is bound by that same duty to maximize the benefit in the trust for the beneficiaries, but that duty does not extend to most of those selling life insurance products. This has created a conflict in the marketplace that trust owned life insurance (TOLI) trustees must recognize. Tomorrow, Tuesday, March 20, at 2PM, we are sponsoring a free webinar providing CE for CFP and CTFA designates that addresses the prudent purchase of life insurance. Click here to register, and if you cannot attend, stop back by our website for a replay at a later date.

 

1.) Fiduciary Rule Dealt Blow by Circuit Court Ruling, Lisa Beilfus, Wall Street Journal, March 15, 2018
2.) N.Y. Urges Life Insurance Fiduciary Standard in NAIC Rule, John Hilton, insurancenewnet.com, January 25, 2018

 

 

NCOIL Tables Model Legislation Efforts to Deal with Cost of Insurance Increases in Life Insurance

NCOIL, the National Council of Insurance Legislators, met in Atlanta last weekend to discuss, among other things, “legislative solutions to unjustified premium increases (1).”

NCOIL is an organization made up of state legislators interested in insurance and financial matters, many of whom serve on related committees in their home states. The goal of the organization is to inform state legislators by creating a venue for interaction and education across state lines. The organization meets three times a year in open sessions that allow the legislators to hear from consumers, industry executives, and regulators.

The organization develops model laws that can be adopted on a state-by-state basis, and part of its published goal is to “preserve the state jurisdiction over insurance” and “speak out on Congressional initiatives that attempt to encroach upon state primacy in overseeing insurance.” The organization provides a needed open setting for the interaction of ideas designed to “improve the quality of insurance regulation (2).”

In its November 2017 meeting, Assemblymember Pamela Hunter of New York, brought up Insurance Regulation 210, a New York regulation we wrote about back in September of 2017. The regulation requires carriers raising expenses or cost of insurance in life and annuity policies to notify the New York State Department of Financial Services at least 120 days prior to “an adverse change in non-guaranteed elements” and to notify consumers within 60 days (3).   The leadership of NCOIL decided to continue the conversation Hunter started at their spring meeting, and on March 3rd, the Life Insurance & Financial Planning Committee of NCOIL met.

Winter storm Riley kept Ms. Hunter from attending the session, which was chaired by Representative Deborah Ferguson, who serves on the House Insurance and Commerce Committee in her home state of Arkansas.

The session opened with a statement by Darwin Bayston of The Life Settlement Association who pointed out there are 142 million life insurance policies in force with $12.3 trillion of death benefit, and stated that the current cost of insurance increases are harming many consumers. Darwin focused on the older population of insureds who had paid premiums for many years only to find that cost increases now made their policies unaffordable.

In my testimony I went over two of the many cases that we have reviewed for trustees at ITM TwentyFirst, where well over $400 million of trust owned life insurance (TOLI) death benefit administered on our Managed Service platform has been affected by the cost increases. I highlighted the problem of trustees, who have a fiduciary responsibility to maximize the asset in the trust, being forced to make decisions that deliver much less benefit to the trust than was expected. I also reviewed the many comments I had received from the public, including advisors who expressed dismay that their clients were subject to cost increases of 150 to 200 percent and consumers who cancelled policies because of COI increases and felt they had been “scammed” – their words, not mine.

Steven Sklaver, an attorney at Susman Godfrey LLP spoke next. Sklaver currently has multiple cases filed against carriers who have raised COI on policies and was “handcuffed” in his presentation as a result. However, he did contrast what is occurring in New York state versus the rest of the country, because of the New York regulation, by calling attention to a situation where a carrier who raised rates elsewhere decided not to raise rates in New York. In his testimony, he questioned whether the carriers could be raising rates across an entire class, as required, if NY state insureds were left out. He also pointed out an issue we have seen at ITM TwentyFirst – carriers not providing in force illustrations on policies in the grace period, a major burden for those of us attempting to help policyholders manage a distressed policy.

Kate Kiernan, Vice President, Chief Counsel and Deputy at the American Council of Life Insurers, spoke for the council, expressing their belief that there was no need for any new regulations concerning cost of insurance increases, either in New York or any other states.

Members of the committee had several inquiries. Representative George Keiser from North Dakota asked Mr. Sklaver several pointed questions, and disputed Steven’s assertion that the carriers were not raising rates across an entire class as required, if New York were left out of the increases.

The chairwoman, Representative Deborah Ferguson, asked me if there was anything in a sales illustration that might alert a consumer to a cost of insurance increase in the future. I informed her that the illustration is not the contract, and in fact, a poor tool to explain the policy. Though the illustration has language that indicates all assumptions could change, there is nothing in the illustration that can predict future changes in the policy.

Senator Bob Hackett from Ohio, a veteran of the financial services industry, opined that cost of insurance increases center more around tracking the policy with in force ledgers than the sales illustration, noting that he reviews the in force ledgers with his clients.  I agreed, but explained that though the cost of insurance in a policy will increase as we age, the cost of insurance increases that were the topic of discussion were beyond the natural rise, and resulted in carrying costs on policies to double or even triple overnight.

Our session, the first of the day, was brought to a halt by the vice chairman, Representative Joe Hoppe of Minnesota, who stated that he thought they should wait to see how it would “play out” in the court system before making the decision to move ahead. With a tap of the gavel, Ms. Ferguson brought the meeting to an end with the committee agreeing to not move forward to develop a model act – at least not now.

We have written often in the past about the cost of insurance increases we have seen in life insurance, including at least one article outlining some possible causes. Over the next year or so as the courts work through the various cases brought against the carriers and market interest rates adjust from the abnormally low rates of the last decade, the story will evolve. We will continue to follow up.

 

  1. NCOIL to Discuss Problems Facing Life Insurance Premium Increases, NCOIL News Release, January 23, 2018
  2. NCOIL website, http://ncoil.org/history-purpose/
  3. NY State Department of Financial Services, 11 NYCRR 48, (Insurance Regulation 210)