Whether there is anything to the Mayan calendar that predicts the end of the world next month or not, there is one thing that is an absolute life insurance fact. Because of actions by the NAIC, National Association of Insurance Commissioners, with the strict enforcement and January 1 deadline to for life insurance companies to comply with AG38, there will be a substantial increase in the cost of no lapse guarantee universal life insurance.
There’s no great surprise in this. It’s been kicked around since the product came out and has been a hot topic, at least of mine, for the last two to three years. It needed to happen. Life insurance companies have been tripping all over themselves trying different ways to make the awesome deals less accessible. Several companies removed the product from their approved list of conversion options on term life insurance. Since the announcement of the deadline most companies have announced that they will raise rates on the product to produce the added reserves needed to sustain it in accordance with Actuarial Guideline 38.This will only be done on new policies, not on policies already in force.
Some companies have decide have decided to abandon the product. So far those are companies whose no lapse guarantee products weren’t competitive anyway. I think abandoning the product is a huge mistake. The no lapse guarantee concept that is based on external funding for permanent plans that mirrors the same guarantees used on long, 20 and 30 year, term life insurance, is a product that has been needed for a long time. The only other avenue for funding long term guarantees has been the building of internal cash value, a viable avenue, but an expensive option. While there are plenty of whole life and probably a lot less traditional universal life, indexed universal life and variable universal life customers out there, the truth is they probably don’t know that they don’t have to be paying so much for permanent life insurance protection.
And for every satisfied cash value product customer there is customer who has who has experienced a personal train wreck because they were sold policies that were underfunded and didn’t have the internal cash reserves to sustain themselves. This was most prevalent in traditional universal life and variable universal life, but not uncommon in whole life insurance. I’ve written before about a customer that had a $5mm whole life policy with Mass Mutual. When he contacted me the policy was costing $89,000 annually and had $1.2mm in cash value accrued. He was in his eighties and wanted to know if there was some less expensive way to protect his estate. When I reviewed his current policy with him, not only did the price stand out as an issue, but at age 95 his policy ran out of cash and imploded.
We were able to replace that with a no lapse guarantee UL doing a 1035 exchange for the cash value and his new premium is $32,000 a year. The premium is guaranteed level to age 100 and at 100 the premiums end and the coverage goes on to age 121 with no further payments, guaranteed. He was a little dubious at the time that those kind of savings could be had and guaranteed, but he is now in his 90’s and has saved hundreds of thousands in premium and sees that nothing has changed on his annual statements. Before he accepted that policy he had lawyers, accountants and other life insurance agents pouring all over it and none found any flaws, because there aren’t any. The only thing exceptional about that particular deal was that a high net worth life insurance client took the step to ask whether he was really being treated fairly.
The impending AG38 changes won’t affect his policy because it is already in force, just like it won’t affect a policy you buy prior to companies repricing for the 1/1 deadline.If that had been going on right now and he missed the opportunity to lock in the lower rates he could have been looking at rates as much as 20% higher, maybe $36,000 annually. It would have still been a great deal, but that extra $6,000 probably feels better in his pocket than not.
Bottom line. There are some great deals to be had out there before the prices go up, so if you have been considering permanent life insurance, have permanent life insurance that doesn’t seem like a good deal or just want to buy a final expense policy that makes AARP look like crooks, call or email me directly. My name is Ed Hinerman. Let’s talk now before the prices go up.