Life settlement industry players want state lawmakers to do something about life insurers’ wave of universal life (UL) cost-of-insurance increases.
State lawmakers are not convinced that this is the right time for them to weigh in.
The National Council of Insurance Legislators (NCOIL) has given a peek at the UL cost-of-insurance increase fight in a meeting summary included in the materials for NCOIL’s summer meeting.
NCOIL held its summer meeting last week, in Salt Lake City. A copy of the meeting summary, from a meeting held in March, is available here.Issuers of UL policies break charges related to mortality protection and administrative expenses out from charges related to investment returns.
Many UL policies are structured in such a way that the issuer has the ability to increase charges related to mortality protection, and for some or all of the administrative expenses, even if some or all of the investment returns are guaranteed.
UL cost-of-insurance increases can discourage consumers from keeping their UL policies.
When life settlement providers buy policies, either from the insureds or from other life settlement entities, they have to pay the premiums to keep the UL policies in force. Big cost-of-insurance increases can eat into their profits.
In some cases, life settlement companies have responded to UL cost-of-insurance increases by suing the life insurers that issued the policies.
The NCOIL Life Insurance and Financial Planning Committee gave life settlement industry representatives and a representative from the American Council of Life Insurers a chance to talk about the issue at NCOIL’s spring meeting, in Atlanta.
What the Life Settlement Reps Said
Darwin Bayston, president of the Life Insurance Settlement Association (LISA), said LISA would like to see NCOIL develop a model act for life insurance cost-of-insurance increases, according to the meeting minutes.
Life insurers have asked for a growing number of cost-of-insurance increases since 2015, and many of those increases have been random and excessive, Bayston said.
Another speaker, Michael Brohawn of ITM TwentyFirst, a life settlement portfolio administrator, described an example of a couple that used survivorship universal life in a trust-owned life insurance arrangement. The issuer imposed a 99% increase in the cost-of-insurance charge in 2016, and that increased the annual carrying costs to $981,707, from $400,000, he said.
Brohawn said he has heard of 200% cost-of-insurance increases.
What the ACLI Said
Kate Kiernan, a vice president at the ACLI, told NCOIL members that well-established state nonforfeiture benefits rules already help consumers get some cash back when they drop UL policies.
The math for valuing nonforfeiture amounts is different for the consumers than it is for life settlement companies, because life settlement companies have spent more cash than the original policyholder insureds have, Kiernan said.
That gap is not the life insurers’ fault, and insurers’ should not have to pay for the life settlement companies’ bad bets, Kiernan said, according to the meeting minutes.
Kiernan also talked about New York state Regulation 210, which is a new regulation that affects the non-guaranteed elements in life insurance policies and in annuity contracts.
Complying with the New York state regulation is complicated, and establishing a similar regulation in other states would be premature at this time, Kiernan said.
What State Lawmakers Said
Minnesota state Rep. Joe Hoppe, R-Chaska, Minn., said at the meeting that he believes the cost-of-insurance conflict is a case of two sophisticated industries involved in litigation.
Hoppe, the committee vice chair, said this is not the proper time for NCOIL to consider developing a model bill, according to the meeting minutes.
The committee agreed to a motion that called for the committee to wait and see how the court cases play out.
Correction: The name of Michael Brohawn was spelled incorrectly in an earlier version of this article.
— Read Dealing With Universal Life Premium Increases, on ThinkAdvisor.