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.
As a primary example, one insurer, not to be mentioned, recently sold its life insurance unit to a larger company. This insurer had, several years ago, introduced one of the most attractive asset-based features into its universal life with secondary guarantee policies. This policy, with all the features and low cost of a guaranteed contract, also allowed the full use of the death benefit to pay for long-term care. The policy, not heavily promoted, was sold and bought by the agents, trustees and insureds who luckily spotted it as the great bargain and problem solver that it was.
We say “luckily” because this is all about to change. The larger company, as expected, is in the process of modifying (read: cheapening) the guarantees. The policy as currently constructed will shortly no longer be available. The deadline to apply for the current policy is Oct. 1. The new policy will cost more and won’t be as good. Currently in-force policies will not be affected by these changes.
But something even newer starts happening today (Sept. 13). New York, which has been the benchmark for life insurance company oversight, is dramatically increasing the reserve requirements for these policies. (See: NY rejects principles-based reserving for life insurers.) Because the premiums on previously sold older policies of this type cannot be increased, it is a sure thing that the premiums on new policies of this genre will have to go up — and substantially so. It will take companies time to adjust their premiums to account for this increased expense.
It is more important than ever to review in-force policies, identify clients who can benefit from asset-based insurance, and encourage them to attain these types of policy contracts before a certain increase in rates and further reduction in benefits.
For more, see: