It’s hard to find any good news in the recent spate of premium increases for older universal life (UL) policies.
Policyholders face difficult decisions they didn’t anticipate when they bought the insurance. Advisors must explain to clients why their policies are at risk, and seek possible solutions. And, insurers seeking rate hikes are experiencing bad publicity and lawsuits.
We asked several advisors and insurance experts how to explain and approach the problem with clients.
Multiple moving parts
- projected investment returns;
- mortality expectations; and
- current and anticipated expenses.
Additional assumptions include expected policy lapse rates, taxes and reserve requirements, among others.
The distinguishing quality in universal life is that the major pricing elements are unbundled, she explains. While most life products provide little breakdown in how the factors contributed to the premium, universal life provides that information.
“With universal life, the policyholder can see how much they’re being charged for their cost of mortality in any given year,” she says. “You can see how much investment gain is being credited to a policy.”
Bundling some insurance policies may present a fiduciary challenge as it can be more difficult to distinguish between product fees. (Photo: iStock)
Unbundling inadvertently creates a “dark side” in product design because insurers make guarantees for each component, says Glenn S. Daily, CFP, a fee-only insurance consultant in New York City.
For example, many UL policies have minimum interest rate guarantees in the 4 percent range. Insurers’ portfolios previously exceeded that level but that situation has changed.
“As interest rates have come down,” Daily says, “the companies claim that they have been squeezed on the interest rate spread that they expected to earn so they haven’t been earning as much on the interest rate as they expected.”
As a result, they’re increasing cost of insurance rates to restore profitability.
In contrast, traditional whole life is a bundled product. Policy holders see their annual dividend but don’t know how the pricing components contributed to that amount. Provided the dividend is considered fair under applicable standards, Daily says, an insurer with whole life business can adapt to a low interest rate environment more readily.
“It’s easier for the company to manage its traditional whole life block in a low interest rate environment because it’s able to offset one component against another, which you just can’t do in the case of universal life,” he says.