A storm is brewing and it is about to hit – with great force and intensity – your policyholders that have older current assumption universal life policies. The magnitude of the destruction will be greater than even that witnessed by Dorothy and Toto and will need more than a wave of the Good Witch of the North’s wand to save.
Got your attention now? Do not ask where you will be able seek protection, as there will be no shelter to be found as this storm ravages policyholders caught without any warning. Even those policyholders and advisors who tried to prevent this devastating event will be caught in its path as it attacks unsuspecting policyholders.
It’s the increases in the cost of insurance – those non-guaranteed COIs that are internally deducted from the account values to cover the net amount at risk and provide the total desired death benefit. Although most advisors and policyholders were led to believe that COIs would be stable and the reason for their indeterminate structure was to benefit the cost structure while reducing reserve costs for the insurer, that myth is about to end.
Many companies are looking at the COIs in their older current assumption blocks of business and determining that these costs should be increased. Given the fact that most current assumption universal life policies are aged, the policyholders are older – with most being over age 65. The increase in the COIs results in their cash value, now being credited at minimum interest rates versus those projected originally, being cannibalized and hence the policy terminating sooner than expected without substantial additional funding.
Why is this happening? The actual interest rates and mortality assumptions have been poorer than those used in creating the COIs originally projected. Replacement has resulted in a significant proportion of healthy policyholders moving to guaranteed universal life, leaving a pool of insureds with adverse mortality. This same thing has been happening with older dividend paying poli- cies as recognized by the bifurcation of the dividends allocated to older policyholders versus new. However, in current assumption universal life policies the result of the increase in the COIs is more devastating.
Companies are notifying policyholders, but often not their advisors. General Agents and advisors are notified via a general announcement, but not told of the specific polices affected and a general idea of what the effect will be going forward. This leaves us with no alternative but to review internal records and request re-projections based upon the current scheduled premium outlay and the outlay now required to keep the policy in force to maturity. The policyholder receiving the notification that the cost of insurance has been increased has no way of interpreting the increase relative to their policy.
As a Brokerage General Agency we are trying to be pro-active, but in many cases we are working with companies that are no longer active and therefore have no relationship. Many blocks of business have been sold to reinsurance companies who serve strictly as administrators and offer minimal policyholder service, making it difficult to identify situations where COIs have been increased. Those companies that have increased COIs have not been proactive in providing policyholders nor advisors sufficient information to make any required changes. This will all result in some policyholders finding out their policy is about to lapse at a time when it is most needed.
Insurance departments designated to provide policyholder protection are often not providing mandates or instructions that serve policyholders by protecting their ability to maintain their policies. This all leaves us in an untenable predicament in serving our advisors. We strongly suggest you contact companies with which you have policyholders that purchased current assumption universal life policies pre-2000 and request re-projections that will enable your client/policyholder to make an educated decision on which they can move forward.
When the dust settles and the storm ends will your clients land safely, as did Dorothy and Toto, knowing the protection intended to protect their families and businesses fulfills its objectives?
You can help assure a happy ending to this story by making certain that your clients are informed and make any adjustments needed to keep their policies from falling into the hands of the Wicked Witch.
Sam J. Kaufman, CEO
CEO, began his career in the life insurance industry in 1968 after graduating from The University of Miami, and in 1973 founded Agent Support Group (then Agent Support Services), a life insurance brokerage agency. He built ASG into one of the first true multi company agencies in New York. His focus on providing value-added service as well as insisting that ASG become a leader in technology allowed the company to grow to become a powerhouse and one of the largest independent life operations in the Northeast. The pioneer who gave brokers their first computerized sales illustrations (Kaufman was one of the first in New York to even own a computer) has now pioneered the ASG mobile app, allowing life agents the ability to do business anywhere and access the latest information in the palm of their hands. Kaufman has played an important role in product development and marketing and has lectured before the New York chapter of NAIFA and the Society of Financial Service Professionals. He is a member of NAILBA and has won numerous industry and carrier awards, including lifetime achievement recognition. ASG, a Lifemark Partner Agency, is a leading multi-company life insurance brokerage agency with operations in New York, New Jersey and North Carolina. They serve as a general agent for many of America’s strongest and most competitive insurance companies, offering a broad spectrum of products to suit many life, annuity, long term care and disability income needs. Kaufman can be reached at Agent Support Group, 99 Park Avenue, Suite 1910, New York, NY 10016. Telephone: 212-292-5760. Email: firstname.lastname@example.org.