Last weekend, the New York Times cast a national spotlight on an emerging problem that many of us have watched unfold quietly in recent years. The Times reported on the recent “skyrocketing” of life insurance premiums demanded by many life insurance carriers and traced the roots of this problem to “a crisis moment for a business once considered a bedrock of financial stability and an industry that supports the retirement of millions.”
That’s bold talk… but it’s a serious diagnosis with serious implications for you and your clients, especially seniors who are living on fixed incomes in their retirement years.
The background to this problem is surprisingly simple. As was reported last year by The Wall Street Journal, insurers sold millions of universal life (UL) policies to consumers in the 1980s and 1990s, a time when actuaries could not conceive that interest rates would remain below 8 percent for an extended period of time. Not only have we been living in a historically low interest rate environment for several years; few actuaries forecast a significant rise in rates anytime soon.
This is a problem for life insurance companies that sold those UL policies, many of which included a 4 percent guaranteed return on the cash value inside their policies. These insurers typically took their customers’ premium dollars and invested them in bonds yielding 8 percent or more. Now those bonds are maturing and the cash must be reinvested, but due to the dramatic change in interest rates over the past 30 years, the same quality of bond instruments are now yielding just 2 percent or so. Uh oh.
As a result, many life insurance companies are under financial stress and their earnings are being squeezed. But as reported by The Times, some insurers have “undertaken various financial maneuvers to pay dividends to their shareholders despite their low earnings” – so something has to give, right?
Sadly, that something has increasingly become the premiums charged by insurers on the policies they sold to those consumers back in the 1980s and 1990s. People who bought those UL policies are now seeing their premiums soar by anywhere from “the mid-single digits to above 200 [percent] in some instances,” according to the Wall Street Journal.
As I wrote in LifeHealthPro earlier this year, these sudden increases in premiums are a brutal blow to seniors who live on fixed incomes and risk undermining the credibility of the life insurance industry with American consumers. In the past, it was just understood that the premiums illustrated at the time the policy is sold would prevail while the policy is in force.
This basic promise to consumers allowed them to have confidence in the integrity of the product they were purchasing. Instead, the recent premium hikes announced by life insurance carriers are a shock to senior policy owners, some of whom can no longer afford the increase in premiums.
At the very least, it would seem reasonable that news of these increases would be accompanied with information about the options available to seniors as an alternative to lapsing or surrendering the policies they have faithfully funded for years. As the trusted financial advisor to your clients, you are an important voice in their lives and can walk them through options available to them in response to this growing problem.
One option that many seniors are finding to be an attractive strategy is to sell their unwanted or unaffordable UL policy to a third party for an immediate cash payment through a life settlement transaction. A life settlement can bring your client roughly seven times more than the cash surrender value in their policy, based on industry averages.
Unfortunately, most American seniors lapse their life insurance policies without knowing that alternatives are available to them. In fact, 90 percent of seniors who lapse policies without knowing about a life settlement indicated they would have considered that option had they known about it and 79 percent feel their advisors should have informed them of the option.
The Life Insurance Settlement Association (LISA) is committed to educating American seniors about this issue and what options they have available to them when life insurance premiums rise. For a brief informational video we created on this subject, please click here.
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