Caution To Investment-linked Policyholder

Life insurance should be managed as an asset that can serve as an essential part of retirement planning. It can provide a sufficient legacy so that retirement income can be maximized for long-term care and medical expenses can be funded with less concern for heirs. And cash value life insurance can also function as an important resource that can provide emergency funds, or, if carefully managed, supplemental retirement income.

Although a surprisingly large number of Americans do not realize that some life insurance policies may contain a cash accumulation account that is usually guaranteed to increase in value and that may provide tax benefits, many others have come to rely upon the tax advantaged growth and low risk that may be promoted by these contracts.

For some holders of older cash value policies structured as “universal life” contracts, this reliance has been met with disappointment as several insurers have of late resorted to raising the mortality costs charged against the cash value accumulation, requiring premium increases or benefit reductions in order to keep the policies in force.

While it has become a familiar experience to face premium increases in these flexible contracts when the performance of cash accumulations do not match original illustrations, in this case policy guarantees may actually be responsible for the changes.

Because of the relatively high guaranteed rates in some older policies—often as much as 4 or even 5%—and with insurers facing the advent of an extended period of low available interest rates on insurance company reserves, some issuing companies look to restore profitability to these blocks of legacy business by raising the internal death benefit costs of the contracts (since the interest rate credited to the cash accumulation accounts can no longer be lowered to match the companies’ earnings).

Although the contracts allow for these increases and increases must be approved by each state’s department of insurance, they have come as a surprise to many policyholders, pointing to the importance of reviewing and managing this type of contract on an ongoing basis.

But, in this case, changes were unexpected because policy provisions were often presented as applying only in cases where a company’s mortality experience departed from expectations, and mortality tables continue to reflect increasing life expectancies (which should operate in the policyholder’s favor).

This, along with the fact that this kind of change had not taken place in the past, led most advisers to think that it was unlikely to take place short of some disastrous occurrence that resulted in reduced (general) life expectancy. Few anticipated changes in death benefit costs in response to losses engendered by interest rates’ falling below policy guarantees.

At the beginning of this month, the Consumer Federation of America issued a warning to state insurance commissioners warning that companies are quietly hiking these costs in order to recover losses due to what now appear to be high guaranteed internal rates. So there is some hope that the states will begin to pay closer attention to similar rate requests on the part of other companies