Universal life cost increases could be 'tip of the iceberg'

Low interest rates could cause many other insurers to follow suit

Dec 7, 2015 @ 2:01 pm

By Greg Iacurci

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Some insurers are raising costs on in-force universal life insurance contracts, due largely to persistently low interest rates, which has some industry watchers concerned more firms will follow suit as rates remain depressed.

“You're going to see more and more of this happen unfortunately if we continue to stay in a low interest rate environment,” Gregory Olsen, partner at Lenox Advisors Inc., said. “I think that this is the time where the rubber meets the road with advisers that have sold these contracts. This is just the tip of the iceberg.”

Voya Financial, AXA and Transamerica figure among the insurers that have raised the cost of insurance for some UL policyholders.

In AXA's case, the changes affect a small block of the insurer's business — 1,700 holders of Athena Universal Life II policies, according to spokesman John Cline.

Transamerica's move affects approximately 26,000 policyholders, according to the Wall Street Journal, which first reported the cost increases.

ACROSS THE INDUSTRY

“Transamerica recognizes that policy owners continue to grapple with the performance of older Universal Life policies that were sold during a time of higher interest rates, something which is not specific to our customers, but is the case across the industry,” spokesman Gregory Tucker said in an e-mailed statement.

According to ITM TwentyFirst, which services life insurance policies for trustees and institutions nationwide, the cost of insurance increases vary widely.

Transamerica, for example, saw increases ranging from the single digits to more than 40%. AXA's hikes were up to 29.4% for policies issued to people in their 70s, and up to 72.4% to those issued in their 80s. In Voya's case, increases range from the single digits to around 20% on its ReliaStar Estate Design product, and up to 40% on the Security Life of Denver Accumulator.

Market share by life insurance product*
Source: LIMRA; *Market share represents annualized premiums paid

Universal life policies have both a tax-advantaged investment and death-benefit component, and can be funded through a lump sum or continued premium payments. The cash value of the account can grow due to minimum guaranteed interest rates provided by insurers, and can shrink due to expenses and cost of insurance.

Insurers could have potentially been in the unfavorable situation of crediting a minimum guarantee to investors that was higher than the interest rates they were earning on the cash portion of the policy, according to Scott Witt, owner of Witt Actuarial Services. A 3% or 4% crediting rate is fairly common on these UL policies, he said.

MINIMAL IMPACT FROM RATE HIKE

While the Federal Reserve is widely expected to raise its benchmark interest rate as soon as next week, some industry watchers think such a move wouldn't stem any policy cost increases that other insurers are weighing.

“These products were not priced for interest rates this low for this long a period of time. Raising rates 25 basis points and having a wait and see [approach] is going to have minimal impact,” Mr. Olsen said.

Investors in UL contracts can pay the insurance costs with the cash value of their account, out of pocket or a combination of the two. A death benefit is provided through the contracts as long as the cash value remains positive. If premiums can't be met, the policies lapse and investors lose the death benefit.

Investors affected by cost of insurance increases could face a situation in which a policy expected to last forever “expires worthless years earlier,” Mr. Witt said.

“Couple that with people living longer and longer, and you see a situation where people could genuinely be concerned with outliving their policy,” he said.

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