By Teresa Kuhn, JD. RFC, CSA
President, Living Wealthy Financial
There’s a certain amount of trust and faith required when
entering into a business relationship, as well as a fair amount of reliance on
companies to follow accepted practices and do the right things for their
clients.
And, while most of us realize that the way
products are marketed may be the polar opposite of how they actually work, we
continue to have faith that what we are being told about the things we buy is
at least somewhat truthful.
As some of the most trusted and respected entities, American
life insurance companies have been successful mostly because ordinary people
have put so much faith in them and their promises.
Throughout our country’s history, people have bought
insurance policies that last for years, often entire lifetimes. They do this believing that the insurer would
never violate their trust by failing to honor the original policy terms or by
doing things that would harm them financially.
Most people, for example, never
expect the company to suddenly exercise a provision in the contract that would
have an adverse financial consequence for them.
Unfortunately, however, such trust may no longer be
justified.
Except for whole life insurance policies, most other
permanent life insurance policies have a right to increase the cost of insurance
built into their contracts.
In the past, most people did not pay much attention to this
particular provision simply because insurers realized it would be bad business
for them to use it. Increasing the cost
of insurance (COI) was just something that was seldom, if ever, done.
Recently, though, unprecedented types of premium increases have
begun to hit consumers. These rate hikes
call into question the trustworthiness of insurance companies and threaten the
entire industry.
At least four major
insurance carriers have published significant rate hikes with no warning to
consumers.
These rate hikes result from increases in the cost of
insurance (COI) companies charge their existing customers.
For those of you who may not know what COI is, it is the
pure insurance protection portion of a policy and is tied to mortality risks.
In the past, COI increases have been unthinkable and
consumers have relied on the implicit and explicit promises of life carriers that they will never have COI
increases. The breaking of this promise
by four big insurance companies virtually guarantees that others will follow.
There’s nothing subtle about these premium increases,
either. Policy holders are getting bills
with anywhere from 40% increases in premiums to over 100 percent! Such increases come at a time when health
insurance, automobile, and other insurance premiums are also increasing.
The impact on older Americans, especially those over age 65,
is tremendous. This is because the highest COI rates occur as
people approach and surpass their expected mortality.
So why are these carriers suddenly starting to raise these
rates and what can you do to avoid having this happen to you?
To understand the reasons for this situation, you need to
know a little bit about how life insurance works.
Nearly all permanent life insurance policies, including indexed
universal life, whole life and variable life, use projected COI to help
determine how the policy will be priced.
Even “guaranteed universal life” contains a mortality
component found on the company’s side of
the risk equation.
If an insurance company’s projections are off and more
insureds die than expected in a particular group, the company can pass those additional
costs along to their policyholders.
This has always been
a possibility, but until this year, COI rate hikes were very rare. Insurance companies realized that doing this
would create massive PR headaches and potentially tarnish their public image.
Now however, major insurers such as Transamerica say they
can no longer afford to maintain public perception at the expense of
profitability.
The company recently
revised COI costs for a huge block of universal life insurance business written
in the 1990’s and now requires all proposals for these policies to be
illustrated at the guaranteed mortality rate, guaranteeing large rate
increases.
Another large issuer of universal life insurance,
Voya
Financial has also notified many of its’ universal life policyholders about coming rate increases.
AXA , which is the largest insurance company in the world,
also recently increased COI rates for a block its’ universal life policies. These policies, in addition to being singled
out due to bad mortality rates, were also chosen according to premium payment
patterns.
Universal life and flexible
premium policies let owners choose how much they pay each year, provided there
is sufficient cash value in the policy.
In addition to adverse mortality rates, the Fed’s stubborn
insistence on maintaining ZIRP (zero interest rate policies) has had a negative
effect on customers’ abilities to fund policies.
If you have one of these types of policies and you’ve
experienced rate increases such as those above, you should contact our
office. We’ll suggest alternate
strategies that may help you offset some of these increased costs.
As an advisor and agent, I can’t believe that insurance
companies would have such callous disregard for their loyal policy
holders. The consequences of increasing
COI are not reflected in a bunch of numbers on the company balance sheet, but
rather in the daily lives of people, especially older Americans who must
somehow deal with this blow to their budgets.
On a positive note, I work hard to ensure that none of my
clients will ever experience such devastating impacts on their budgets. At Living Wealthy Financial we are extremely
selective about the companies we use to implement our Bank on Yourself®
strategies.
We know that other permanent life solutions shift the risk
back onto the insured, which in effect means the INSURED is now responsible for
making the insurance company’s guarantees work.
How crazy is that?
Sure, whole life might not seem as “sexy” as these other
types of insurance, but how much of your savings can you afford to risk? I would guess your answer is “none.” If that’s the case, then you need a strategy
that reflects the true purpose of insurance- to pass risk from the INSURED to
the COMPANY, not vice-versa.
If you are working with a stock company, versus the mutual
companies with whom I work, then you should know that those stock companies are
geared toward making decisions designed to maximize their shareholder’s
wealth…not yours. That means that in the
long run they are not too motivated to do what works best for policyholders.
PS: If you have a policy that is with a stock company, and you’d
like us to analyze it and make recommendations, at absolutely no cost or
obligation to you, then call our office now at (800) 382-0830 or visit our website at http://livingwealthyfinancial.com/
