At a tipping point: COI increases for seniors owning UL policies

As Newton’s law of motion reminds us, for every action there is an equal and opposite reaction. Viewing Newton’s theory from inside the life settlement industry, the image that readily comes to mind is that of furious UL policy owners railing against the recent COI increases by major carriers.

There’s little doubt that many seniors who own troubled universal life policies are at a financial tipping point. And it’s easy to understand their frustrations considering the following:

• Strike One: For nearly 10 years, UL policy owners have endured lower-than-expected interest crediting rates for UL policies, where cash accounts were intended to fund future premiums.

• Strike Two: While shelling out more for premium payments due to Strike One, seniors who may have been counting on stock market returns to help fund annual premium payments are currently experiencing zero returns (or even losses) in their retirement portfolios.

• Strike Three: Then along comes the recent COI increases for UL policies, with some increases ranging as high as 200 percent.

While many seniors may feel the COI increase was the last straw, the extent of the fallout from those who believe they’ve been pushed to the brink is yet to be determined. As policy owners grapple with the economic reality of owning troubled policies, Newton’s law leaves one to ponder whether there will be equally challenging setbacks for carriers as a result of the COI increase.

Some industry insiders cite the following potential scenarios:

• Has a carrier’s reputation been tarnished for seemingly reneging on a perceived commitment involving seniors who thought their cost of insurance or premiums would be as illustrated at purchase?

• Will the carrier’s sales be impacted if top producers depart to other organizations where they have a greater chance of engendering client trust?

• What are the chances that a greater number of affected UL policies will find their way to the secondary market, thereby intensifying the carrier’s losses as more policies mature and death benefits are paid out to institutional investors? Ironic for sure, because it’s one of the factors that some carriers reportedly cited as justification for the increase.

Only time will tell the extent of the reaction to the COI rate increases. But from what we observe, the secondary market for life insurance just became a lot more attractive to seniors with troubled UL policies. We’re already seeing some of these policies come through the door.

That’s not to say there will not be challenges for life settlement provider shops when these policies wind their way to the “pricing Abacus.” Providers are tuned in to the fact that the COI increase may result in lower purchasing prices for the acquisition of new policies.

Life expectancy and longevity risk analyses will take on ever greater significance. And the situation could very well mean lower than expected returns for institutional investors who currently own portfolios that contain policies affected by the COI increase.

Notwithstanding the challenges ahead and the adjustments that may need to be made on the secondary market side as it relates to the risk analysis for COI-impacted policies, Newton’s third law must be reckoned with, as does the aphorism, “what goes around, comes around.”