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.

New Report on Interest Rates and Life Insurance Carriers Notes Concern

In the past few years, we have had no shortage of entries about the historic low-interest-rate environment and the beating that life insurance policies took because of it.  Whole life dividends have dropped, current assumption universal life performance has been driven down, and in some cases, cost of insurance (COI) increases have raised carrying costs by over 200%. All primarily because of low-interest rates.  We have even written about the effect of the low rates on long-term care insurance policies, though we do not deal with them.  At times it has been downright depressing to report on well-known industry executives decrying the low rates were “destroying the viability of insurance companies” and leaving us in an “environment…unsustainable over any reasonable period.”

In the last year or so, we have seen a rise in interest rates with the 10-year Treasury recently crossing the 3% mark. It is only natural to think of a rise in rates as good news for the insurance industry.  Carriers collect premium dollars, invest the monies in fixed instruments and then pay out the benefits in the future so rising rates would be a plus, right? Not so fast.

Two weeks ago (April 23, 2018), AM Best released a special report in which it cited continuing low rates, a flattening yield curve, regulations, potential for market corrections and the need for innovation as reasons for a “negative outlook” on the US life and annuity market (1).

One issue stood out – the potential for an abrupt increase in interest rates.  As pointed out in the report, carriers “prefer gradual increases” in interest rates that “allow them to adjust their credited rates on liabilities and their asset portfolios to optimize returns.”

The report noted current underlying factors –  increasing wage growth, the effect of the Tax Cuts and Jobs Act and tariffs on steel and aluminium – that “could cause a rapid increase in interest rates.”

Wages have grown at the fastest pace since 2009 (2).  A recent Wall Street Journal article noted that firms are competing to “hire scarcer workers.”  The same article reported inflation hit the Fed’s 2% target and that a “sustained pickup in inflation in the months ahead” driven by trade tariffs and a weak dollar could “push up prices” on imports (3).

The effect of the Tax Cuts and Jobs Act may not be the only reason the federal government debt is ballooning, but it is expanding at a fast pace and that may increase interest rates. The Treasury announced in an April 30th Press Release that during the January to March 2018 quarter, it had borrowed $488 billion, a record for that period (4).  A Bloomberg report noted that spending increased at three times the pace of revenue growth in the October-to-March period (5).

A study that measured the influence of budget deficits on interest rates showed there is a “statistically and economically significant” relationship between deficits and long-term interest rates. It projected that when the deficit to GDP ratio increases by one percentage point, long-term interest rates increase by roughly 25 basis points (6).

According to a recent Congressional Budget Office (CBO) report, federal debt held by the public is projected to rise in a relatively straight-line fashion from 78 percent of GDP at the end of 2018 to 96 percent of GDP by 2028. That percentage would be the largest since 1946 and well more than twice the average over the past five decades (7).

If the study and projection are to be believed, we can expect long-term interest rates to increase by as much as 4.5% over the next decade.  The increase may not lead to a harmful outcome for insurance carriers – if the increases are not dramatic, but slow and steady. A slow, smooth increase allows carriers to “adjust crediting rates on existing products, reshape their portfolio durations and help maintain credit quality for an optimal return that would satisfy their risk-based capital ratios and risk tolerances. (1)“

But a quick jump in rates could cause issues, as the AM Best report points out, including disintermediation with policy holders dropping life and annuity policies for higher returns elsewhere in instruments like bank CDs.  Carriers with “minimal surrender protection” would be hardest hit. Policyholders left could take advantage of low-cost policy borrowing opportunities to increase loans on policies. Both events would cause liquidity risks for carriers.  In the past when this has occurred, carriers had to liquidate investments prematurely to raise cash for surrender and loan payments.

According to the AM Best report, the search for higher yields has caused insurers to lengthen bond maturity with “portfolios at their longest durations in at least 17 years,” with those at the short end – maturing in less than five years – “at the lowest point in nearly two decades.”

The effect of interest rates on bond prices is somewhat dependent on bond duration.  AM Best data shows the current market value of life industry bonds is about 6.3% over book value. However, according to the report, a 100 basis point change in interest rates would bring the market value below book value, creating unrealized losses and the unrealized gains that accrued while rates were at historic lows could quickly start to reverse, which would negatively affect reserves.  The saving grace is the “longer-tail nature” of most insurance carrier liabilities, but again, liquidity needs would exacerbate the problem.

The life insurance market and insurance carriers, in general, have weathered an extremely fierce economic storm in the last decade. Let’s hope the next few years bring smooth sailing with gently increasing rates and a calm financial market.



  1. Best’s Special Report, Abrupt Interest Rate Hike Could Pose Challenges to Life Insurers, AM Best, April 23, 2018
  2. America Gets a Raise: Wage Growth Fastest Since 2009, CNN Money, February 2, 2018
  3. US Inflation Hit Federal Reserve’s 2% Target in March, Harriet Torry and Andrew Tangel, Wall Street Journal, April 30, 2018
  4. US Treasury Press Release,
  5. Mnuchin Sees Solid Treasuries Demand After Record U.S. Borrowing, Saleha Mohsin and Randy Woods,, April 30, 2018
  6. Budget Deficits and Interest Rates: What Is the Link?, Edward Nelson and Jason J. Buol, Federal Reserve Bank of St. Louis.
  7. Congress of the United States Congressional Budget Office, The Budget and Economic Outlook: 2018 to 2028




The Life Insurance Dividend Season (Continued)

In an earlier entry, we reported on the dividend declarations from two of the gold standard mutual insurance companies – Northwestern Mutual and Massachusetts Mutual. Both are very highly rated carriers, and have paid dividends each year for well over 100 years. However, like most insurance companies these days, both are feeling the effects of the historic low interest rate environment, and as a result, have reported lower dividend interest rates (DIR).

MassMutual’s reported DIR for 2018 is 6.40% – a drop from the 2017 rate of 6.70% (which was down from the 2016 DIR rate of 7.10%). Northwestern Mutual declared a 2018 dividend interest rate that dropped to 4.9% from the 2017 DIR rate of 5% (which was down from the 2016 DIR rate of 5.45%).

Since our last post, both New York Life and Guardian Life have reported their dividend interest rates.

New York Life reported a 2018 dividend payout of $1.78 billion, the largest in the history of the company and the 164th consecutive year of dividend payouts. The DIR rate for NY Life was 6.1% (which was down from their 2017 rate of 6.2%). In announcing the DIR drop, their first since 2012, New York Life referenced, “the continued historic low level of interest rates, which constrain our investment returns.”

Guardian Life, who has paid dividends each year since 1868, reported a $911 million dividend payout. The DIR for Guardian remained the same as it was in 2017- 5.85% (which was down from their 2016 rate of 6.05%).

So, for 2018, 3 of the 4 carriers mentioned lowered their DIR. It will take a while for portfolio returns to turn around for insurance carriers. Almost exactly 3 years ago we reported on the dividends for these same four carriers. In that entry, our visual was a battleship and the title referenced the fact that raising dividends is much like turning a battleship around. We featured a quote from the chairman of New York Life at the time, who noted, “The downward pressure on interest rates continues to be challenging for life insurers.”  In announcing the 2018 dividend, Roger Crandall, MassMutual Chairman, President and CEO, referenced the “backdrop of a prolonged low interest rate environment.” Not much has changed.

However, this week the Fed raised rates by a quarter of a percentage point to a range of 1.25 to 1.50 percent, its third rate hike this year, with its forecast of three additional rate increases in 2018 and 2019 unchanged.

Maybe by next year the battleship will really begin to turn around.

The Year in Review: Trust Owned Life Insurance (TOLI) in 2017

While 2017 was another challenging year for those of us who manage life insurance portfolios, ITM TwentyFirst started the year highlighting the efficiency of life insurance in an ILIT as a preferred method of passing wealth to the next generation. In our first post of the year we cited an example of a 65-year-old couple in good health purchasing a survivorship guaranteed universal life (GUL) policy. The policy relies on a fixed annual premium paid in full and on time each yemedium[2].jpgar for its guarantees, but for those with the cash flow to fund the asset, the return on the death benefit is very attractive.   As seen in the spreadsheet to the right, if the death benefit was paid twenty years out (age 85) the internal rate of return (IRR) on the death benefit would be 11.36%. If it was paid 30 years out (age 95) the IRR would be 5.36%. Even at age 100, the IRR would be over 3.6%. Remember, the policy death benefit is guaranteed (if the premium is paid in full and on time), which makes these returns even more attractive when compared to other “guaranteed” investments. Yes, life insurance can be a great way to leverage assets to the next generation, but managing the asset can be difficult and this was another trying year.Restrictions were placed on in force illustrations for a handful of carriers, which limited our ability to review some policies. In a February post we noted that John Hancock cited “regulatory standards that govern illustration practices” for limiting the illustrations on some Performance UL policies issued between 2003 to 2010. The issue stemmed from the fact that “experience has differed from the current assumptions which are reflected in the illustrations.”  In at least one instance in 2016, restrictions on in force illustrations were a direct precursor to a cost of insurance (COI) increase.

Some carriers did increase the cost of insurance on policies. In July, we reported on a Lincoln National increase on a block of universal life policies. The carrier cited “updated projections” of “future costs” for providing coverage, stating “future expectations” of “cost factors, including mortality, interest, expenses and the length of time policies stay in force” changed, so COI rates were adjusted to “appropriately reflect those future expectations.” Other carriers with COI increases in 2017 included Phoenix and Transamerica.

Lawsuits against carriers for COI increases that started in 2016 spilled over into 2017, with lawsuits against both Transamericaand Lincoln National moving ahead. One case against Transamerica was heard this year. In that case, an African-American church in Los Angeles that had enlisted an investment group to finance 2,400 life insurance policies providing burial funds for congregants, filed suit, along with the investor, against Transamerica for a 50% COI increase. They alleged among other things, breach of contract in violation of California law and breach of the covenant of good faith and fair dealing. In September, a jury found in their favor and awarded $5,608,495.57 in damages.

Also in Septemberthe New York State Department of Financial Services issued regulations to protect New Yorkers from “unfair and inequitable cost increases in in-force policies.” The new regulations prohibit “life insurers from changing non-guaranteed elements in a discriminatory way for members of the same class of policyholders . . . only certain enumerated factors, which do not include profit, can be considered when seeking to change non-guaranteed elements.” Carriers are required to notify the department 120 days prior to an adverse change in non-guaranteed elements. Consumers are to be notified at least 60 days prior to any changes. As far as we know, this is the only state that has developed regulations specifically around COI changes.

A new methodology for calculating policy reserves for life insurance policies took effect in 2017. Principle-Based Reserving (PBR) lessens the need for changes to regulations and laws as new products are introduced. Under the new methodology, states “establish principles upon which reserves are to be based rather than specific formulas.” According to the National Association of Insurance Commissioners (NAIC), under the current formula, the risks, liabilities and obligations are not always correctly “reflected,” and “for some products this leads to excessive conservatism in reserve calculations, for others it results in inadequate reserves.” Reserve requirements are just one part of the life insurance policy pricing formula, other factors such as mortality and overhead expenses and investment returns, also play a major role. While regulators believe the “right sizing” of reserves will benefit consumers as holding higher reserves tends to increase costs, and holding reserves that are too low puts the consumer at risk, it is not clear yet how it will affect pricing on new policies.

The overriding concern in 2017 has been the historic low interest rate environment we are still in. As we have written about in the past, the low rates create winners (borrowers) and losers (lenders), and since insurance companies get most of their investment income by lending premium dollars until benefits are paid, they are among the biggest losers. The low rates have been linked by some to the COI increases we have seen. The fixed investment environment has also put carriers in an unenviable situation. We reported on industry executives who believe the “persistent low rates” are “destroying the viability of insurance companies,” with many companies “not earning their cost of capital,” leaving the industry in an “environment” that is “unsustainable over any reasonable period of time.”

While 2017 has had its challenges, ITM TwentyFirst is growing dramaticallly. We have hired an additional New Business Development Specialist to assist with the increasing surge in demand from financial institutions to outsource their trust owned life insurance operations. Located in the northeast corridor, Walt Lotspeich is a 20-year veteran of the trust industry, and a great asset to our team. Our outsourcing service, the Managed Solution, is the fastest growing segment of our TOLI business, as trustees focus their internal efforts on more profitable business lines and allow us to take over the day-to-day back office operations of their TOLI business.

In 2018, we will continue to grow, and in the next month, we will be introducing a new affiliated company that will further cement our role as a leader in the Trust Owned Life Insurance space. For those who are interested in learning more about our view of the TOLI landscape in 2017 and beyond, we have scheduled a free webinar for December 12th at 2pm Eastern. TOLI Issues and Solutions – 2017 Year in Review will provide one hour of continuing education credit for CFP, CTFA and FIRMA members. If interested, please click here to register.

Trustee Alert: New Tax Law Changes (Simplifies) Tax Reporting On Life Settlement Sales

Back in May we wrote about the need for trustees to be aware of life settlements. A life settlement can provide a TOLI trust with more value than a policy surrender. The role of a TOLI trustee dictates that all assets are maximized – including “unwanted” life insurance policies.

In the past, tax reporting around a life settlement was onerous, primarily because of an IRS ruling enacted in 2009. IRS Ruling 2009-13 dictated that policy sellers reduce the cost basis in the policy sold by the cumulative cost of insurance charges incurred. The requirement was, at best, burdensome. Often it was impossible to comply with. Most carriers had difficulty providing the information, for some policies it was virtually impossible to compute the amount. The reduction in cost basis also increases the tax burden to the seller, reducing the net amount available to the trust and the beneficiaries.

The new tax bill, The Tax Cut and Jobs Act, in Section 13521, Clarification of Tax Basis of Life Insurance Contracts, reverses the IRS ruling, allowing for “proper adjustment” … for… “mortality, expense or other reasonable charges incurred under an annuity or life insurance contract”.

The taxation of a life settlement is now similar to the taxation of a policy surrender – with a twist since in a sale the policyholder is receiving an amount greater than just the cash surrender value. In a policy surrender, ordinary income tax rates apply to the amount received (cash surrender value) above cost basis. With a life settlement, the policyholder receives more than the cash surrender value and that amount is considered an “investment” taxed at capital gains rates.

Determining the taxation of a life settlement is now an easier three-step process. Let’s look at an example:LSTax.jpg

Assume a policy holder sold a policy and received $375,000. Further assume total premium paid (we will assume this is the cost basis for simplicity, as it usually is) was $100,000 and the policy had cash value of $125,000.

In the first step, you simply subtract the cost basis from the amount received to arrive at the total gain in the sale.

In Step #2, you determine the amount that is attributable to ordinary income tax rates by subtracting the cash value from the cost basis to arrive at the ordinary income received. In Step #3, to compute the capital gains amount you simply subtract the ordinary income amount in the second step from the total gain found in the first step. Note that if there is no cash value (a term policy, for example) the entire amount received would be taxable at capital gains rates.

The change in the tax code will simplify the tax computation of a policy sale and perhaps prompt more policyholders to investigate a life settlement. It will certainly make the transaction more profitable for those that do. In our example above, the policyholder received $375,000, with taxes due on $275,000 ($25,000 at ordinary rates, $250,00 at capital gains rates). If the policy in question had $50,000 in cost of insurance taken out, taxes would be due on $325,000 ($25,000 at ordinary rates, $300,000 at capital gains rates).

One final note…the effective date of the amendment was listed in the new bill for “transactions entered into after August 25, 2009,” which corresponds to the date of IRS Ruling 2009-13. Does this mean that those who may have paid higher taxes in the last eight years are in for a tax rebate? That part is not clear.

New York State Proposes “Best Interest” Standard in Sale of Life Insurance and Annuities

Last week, the New York State Department of Financial Services proposed an amendment to state insurance regulations that would, according to its December 27th press release, “adopt a “best interest” standard for those licensed to sell life insurance and annuity products.” This new amendment “would require that the product that best reflects the customer’s interest be offered ahead of what is most profitable to the seller.”

Historically, New York has been the most aggressive state in regulating life insurance. In a recent blog entry, we noted that it was the first state to address the recent cost of insurance increases the industry has seen. This new amendment appears to be in direct response to the Trump administration’s decision to delay the implementation of many of the key provisions of the Obama administration’s Department of Labor fiduciary rule. That regulation required financial advisers serving retirement accounts to act in the client’s best interests and has become something of a political hot potato. The announcement quoted Governor Andrew Cuomo, a potential Democratic nominee in the 2020 presidential race, who said, “As Washington continues to ignore and roll back efforts to protect Americans, New York will continue to use its role as a strong regulator of the financial services and insurance industries to fight for consumers and help ensure a level playing field.”

New York is not the only state that has moved ahead in creating a best interest standard. In July 2017, Nevada implemented a law that applies to brokers working with both retirement and non-retirement accounts. California, Missouri, South Carolina, and South Dakota also hold brokers to a fiduciary standard, with other states providing similar, but lesser, requirements. (1)

Some financial service designations have their own standards. The newly revised and proposed Certified Financial Planner (CFP®) Board’s Code of Ethics and Standards of Conduct requires all who have that designation to act with “honesty” and “integrity”; furthermore, they must always act “in the client’s best interest,” placing the interests of the client above the interests of the CFP. (2)

The New York law applies specifically to any life insurance or annuity sale, including replacements, and requires the producer, when evaluating the suitability of a product, to act with “care, skill, prudence, and diligence that a prudent person familiar with such matters would use under the circumstances without regard to the financial or other interests of the producer, insurer, or any other party.” The reference to the financial interests of the producer is the major difference between this and prior suitability standards. In the past, suitability referenced the client’s objectives and financial situation but typically had no reference to compensation for the producer. The difference in compensation between products can be large, as life insurance and annuity payouts differ widely from carrier to carrier and even between producers. A higher payout does not necessarily mean an inferior product.

Over the past few years, Aaron Hanson, CLU, who heads up our Remediation Department, has reviewed many life insurance policy transactions. Most of these transactions were justified, but in some instances, he has come across replacements that would have provided higher risk and/or lower death benefit to the trust than the existing policy, the only real benefit being the commission paid to the producer. Had his team not caught those cases, they would have put the trust owned life insurance (TOLI) trustee at risk of indefensible litigation. So, we have a firsthand understanding of these issues. Life insurance is a complex financial interest, and it is easy for the consumer, even a well-meaning TOLI trustee, to be taken advantage of. (Note: We know of at least one high five-figure settlement paid by a TOLI trustee in 2017 on a “bad” replacement case we did not review.)

However, we also understand the challenge in regulating “best interest standards” with life insurance. How many regulators really understand the nuances of life insurance and a life insurance product sale or replacement? Perhaps the emerging answer might be having fee-based life insurance experts with nothing to gain review a life insurance policy transaction, taking the commission incentive out of the transaction analysis. There are many good fee-based life insurance experts in the field – not just us. Hopefully, the market will begin to recognize their value.


  1. Nevada Says Brokers Must Now Be Fiduciaries, Barron’s, June 16, 2017
  2. CFP Board, Revised Proposed Code of Ethics and Standards of Conduct, public release date December 20, 2017

John Hancock To Raise Cost Of Insurance (COI) On Performance Universal Life Policies

In February of last year, we reported on limitations placed on inforce illustrations for John Hancock Performance universal life policies. At that time, the carrier announced a “temporary” situation, saying they were unable to provide current inforce illustrations because “regulatory standards that govern illustration practices . . . prevent us from illustrating currently payable amounts based on our current non-guaranteed elements.”

In that report, we mentioned that in the past, the inability to provide inforce ledgers was often a precursor to a cost of insurance (COI) increase. It appears as if it was for John Hancock.

On January 18th, The Life Settlements Report, a trade publication, reported that John Hancock will be raising the cost of insurance (COI) on 1,700 Performance policies. The publication cited a representative of the New York Department of Financial Services, who confirmed that the carrier had provided “voluntary” notice to the regulatory body.

In September of 2017, we reported on a regulation approved in New York state that required carriers to notify the department “at least 120 days prior to an adverse change in non-guaranteed elements of an in-force life insurance policy.” Though the regulation has not gone into effect, the agency spokesman did confirm that the carrier provided notice, according to the earlier report.

Our New York City office was told that John Hancock is “expecting to have illustration availability in early 2018.” We manage approximately 200 of the 1,700 policies affected and as soon as we receive the information and analyze it, we will report on the size of the cost increase.