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

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.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Mar 13

Conference

WOMEN to WATCH

InvestmentNews is honoring female financial advisers and industry executives who are distinguished leaders at their firms. These women have advanced the business of providing advice through their passion, creativity, inclusive approach and... Learn more

Featured video

INTV

Diversity & Inclusion Awards: 2018 nominations are open

Editor Fred Gabriel and special projects editor Liz Skinner discuss the nomination process for InvestmentNews' inaugural Diversity & Inclusion awards.

Latest news & opinion

Cetera reportedly exploring $1.5 billion sale

The company confirmed it's talking to investment bankers to 'explore how to best optimize [its] capital structure at lower costs.'

SEC Chairman Jay Clayton outlines goals for a new fiduciary standard

Rule should provide clarity on role of adviser, enhanced investor protection and regulatory coordination.

Advisers bemoan LPL's technology platform change

Those in a private LinkedIn chat room were sounding off about fears the independent broker-dealer will require a move to ClientWorks before it is fully ready.

Speculation mounts on whether others will follow UBS' latest move to prevent brokers from leaving

UBS brokers must sign a 12-month non-solicit agreement if they want their 2017 bonuses.

Maryland jumps into fiduciary fray with legislation requiring brokers to act in best interests of clients

Legislation requires brokers to act in the best interests of clients.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print