Popular univeral life policies sure to become more costly

As you may recall, we have been enthusiastic about improvements in life insurance policy design over the last several years.

In particular, we favored the innovation called universal life with secondary guarantees. This type of life insurance permitted a much lower cost per thousand dollars of face amount than the typical whole life policies being offered, while simultaneously guaranteeing a predictable result. Your client literally bought an insurance contract stating that if he paid X premium for X years, he would be  guaranteed a result illustrated at the point of original sale.

These types of policies could be constructed at the outset to provide coverage to whatever age the client felt was a reasonable estimation of his life expectancy. For example, we would typically project a premium that would cover the client to age 105 or 110. And this premium would often be thousands less than the more traditional types of life insurance, such as traditional whole life, and often no more than the older types of universal life insurance that offered no such guarantees.

Clients who have bought these policies have benefitted enormously, due to the fact that more traditional types of insurance — such as traditional universal life, ordinary life and variable life — have, in the last five years, been adversely affected by historically low interest rates and/or stock market volatility.

More recently, another very worthwhile innovation was introduced by some insurers, sometimes called asset-based life insurance. This type of policy enables the death benefit to be utilized, in some form, toward paying for the insured’s long-term nursing care, at home or in a facility, if needed prior to death.

We have reasoned, in the attached article, that this was a truly valuable enhancement in life insurance policy design. Indeed, the historically low interest rates mentioned above, have created a situation where clients often are forced to liquidate assets to pay for such care, because their portfolio returns simply are unable to cover the costs. This is particularly the case for married individuals, with one spouse at home needing to support household-related expenses while paying for the others’ nursing care.

In the future, in this writers’ opinion, some of these innovations will be seen as somewhat of an over-reach by insurers hungry to add business to their books. Indeed, as insurers realize a paucity of profits, they have been cutting back on all sorts of guarantees that were commonplace.

While off the subject a bit, it is apparent for example, that the extremely valuable guarantees that were typically available in variable annuities offered by life insurers (such as enhanced death benefits and guaranteed income benefits) are being cheapened and/or disappearing altogether from their new contracts. And some companies have actually figured out novel ways to withdraw these guarantees on existing contracts!

These trends are normal. Innovative insurance products are introduced that are intended to beat the competition — then pulled back or withdrawn altogether, as their lack of profitability becomes apparent.