By Teresa Kuhn, JD. RFC, CSA
President, Living Wealthy Financial
There’s a certain amount of trust and faith required when entering into a business relationship, as well as a fair amount of reliance on companies to follow accepted practices and do the right things for their clients.
And, while most of us realize that the way products are marketed may be the polar opposite of how they actually work, we continue to have faith that what we are being told about the things we buy is at least somewhat truthful.
As some of the most trusted and respected entities, American life insurance companies have been successful mostly because ordinary people have put so much faith in them and their promises.
Throughout our country’s history, people have bought insurance policies that last for years, often entire lifetimes. They do this believing that the insurer would never violate their trust by failing to honor the original policy terms or by doing things that would harm them financially.
Most people, for example, never expect the company to suddenly exercise a provision in the contract that would have an adverse financial consequence for them.
Unfortunately, however, such trust may no longer be justified.
Except for whole life insurance policies, most other permanent life insurance policies have a right to increase the cost of insurance built into their contracts.
In the past, most people did not pay much attention to this particular provision simply because insurers realized it would be bad business for them to use it. Increasing the cost of insurance (COI) was just something that was seldom, if ever, done.
Recently, though, unprecedented types of premium increases have begun to hit consumers. These rate hikes call into question the trustworthiness of some insurance companies and threaten the entire industry.
At least four major insurance carriers have published significant rate hikes with no warning to consumers.
These rate hikes result from increases in the cost of insurance (COI) companies charge their existing customers.
For those of you who may not know what COI is, it is the pure insurance protection portion of a policy and is tied to mortality risks.
In the past, COI increases have been unthinkable and consumers have relied on the implicit and explicit promises of life carriers that they will never have COI increases. The breaking of this promise by four big insurance companies virtually guarantees that others will follow.
There’s nothing subtle about these premium increases, either. Policy holders are getting bills with anywhere from 40% increases in premiums to over 100 percent! Such increases come at a time when health insurance, automobile, and other insurance premiums are also increasing.
The impact on older Americans, especially those over age 65, is tremendous. This is because the highest COI rates occur as people approach and surpass their expected mortality.
So why are these carriers suddenly starting to raise these rates and what can you do to avoid having this happen to you?
To understand the reasons for this situation, you need to know a little bit about how life insurance works.
Nearly all permanent life insurance policies, including indexed universal life, whole life and variable life, use projected COI to help determine how the policy will be priced.
Even “guaranteed universal life” contains a mortality component found on the company’s side of the risk equation.
If an insurance company’s projections are off and more insureds die than expected in a particular group, the company can pass those additional costs along to their policyholders.
This has always been a possibility, but until this year, COI rate hikes were very rare. Insurance companies realized that doing this would create massive PR headaches and potentially tarnish their public image.
Now however, major insurers such as Transamerica say they can no longer afford to maintain public perception at the expense of profitability.
The company recently revised COI costs for a huge block of universal life insurance business written in the 1990’s and now requires all proposals for these policies to be illustrated at the guaranteed mortality rate, guaranteeing large rate increases.
Another large issuer of universal life insurance,
Voya Financial has also notified many of its’ universal life policyholders about coming rate increases.
AXA , which is the largest insurance company in the world, also recently increased COI rates for a block its’ universal life policies. These policies, in addition to being singled out due to bad mortality rates, were also chosen according to premium payment patterns.
Universal life and flexible premium policies let owners choose how much they pay each year, provided there is sufficient cash value in the policy.
In addition to adverse mortality rates, the Fed’s stubborn insistence on maintaining ZIRP (zero interest rate policies) has had a negative effect on customers’ abilities to fund policies.
If you have one of these types of policies and you’ve experienced rate increases such as those above, you should contact our office. We’ll suggest alternate strategies that may help you offset some of these increased costs.
As an advisor and agent, I can’t believe that insurance companies would have such callous disregard for their loyal policy holders. The consequences of increasing COI are not reflected in a bunch of numbers on the company balance sheet, but rather in the daily lives of people, especially older Americans who must somehow deal with this blow to their budgets.
On a positive note, I work hard to ensure that none of my clients will ever experience such devastating impacts on their budgets. At Living Wealthy Financial we are extremely selective about the companies we use to implement our Bank on Yourself® strategies.
We know that other permanent life solutions shift the risk back onto the insured, which in effect means the INSURED is now responsible for making the insurance company’s guarantees work. How crazy is that?
Sure, whole life might not seem as “sexy” as these other types of insurance, but how much of your savings can you afford to risk? I would guess your answer is “none.” If that’s the case, then you need a strategy that reflects the true purpose of insurance- to pass risk from the INSURED to the COMPANY, not vice-versa.
If you are working with a stock company, versus the mutual companies with whom I work, then you should know that those stock companies are geared toward making decisions designed to maximize their shareholder’s wealth…not yours. That means that in the long run they are not too motivated to do what works best for policyholders.
PS: If you have a universal or variable life insurance policy that is with a stock company, or are thinking of purchasing one, and you’d like us to analyze it and make recommendations at absolutely no cost or obligation to you, then call our office now at(800) 382-0830.