What’s not being said?
December 14, 2021 by Sheryl J. Moore
Earlier this year, we explored things that the insurance company might not tell you when writing indexed annuity business. In this article, we will look at indexed life insurance products.
Bait-and-Switch on Inforce Renewal Rates
Why would someone reduce the credited rates/caps/etc. on an inforce life insurance policy? How about because on indexed life, the insurance company has to buy new options every year, if there is an annual reset indexing method on the policy? There is also a direct correlation between inforce renewal rate behavior and method of delivering insurance policies. In the independent agent distribution, insurance companies have a habit of providing “shiny bright objects” to distribution in the first year. After all- how can they get agents to sell with them, as opposed to their 99 competitors, unless they have “competitive” products? These products are often subsidized with the renewal rates in years two plus on the policy.
Increasing the Interest Rate Charged on Loans
When I first started in the life insurance industry, we took a feature of participating whole life, and stuck it on indexed UL: variable loans. More specifically- variable loans without direct recognition. By taking this legacy product feature, and placing it on a product that earns limited interest based on the performance of stock market indices, we wrote insurance history. We were illustrating credited rates of [7.40%] on our IUL, and max loaning those suckers to the hilt, at a loan rate of [3.40%]. That four percent positive arbitrage looked great! While we were charging loan interest, the monies that were loaned-against continued to earn indexed interest. The result? An illustration that appeared to show one “making money off their life insurance,” despite taking the maximum amount of loans out of the contract. The problem? Loan rates had never been lower than at that time. Moody’s Corporate Bond Yield Average is a benchmark for life insurance loan rates, and has historically floated around 8.00%. So, that 3.40% illustrated loan rate likely won’t be the rate in effect, one the policyholder initiates their loan regime 20 years after issue. No matter if one is using variable rate loans, participating fixed rate loans, or something marketed as “indexed loans,” this is relevant. White the loan rate may not be a toggle that can move, something else will in its stead.
Increasing the Insurance Charges
This one may seem like a no-brainer to you. After all- we all know that premium loads, policy fees, per 1,000 charges, percent of fund charges, and cost of insurance charges can, and do, change. However, sometimes UL products have other factors in them that can change too. In fact, an infamous case involving an [X] factor on a life insurance company’s UL products brought one insurer not just to court, but into the Texas legislature. The insurer in question hadn’t increased their traditional UL charges to an unreasonable level, but a previously-unheard-of [X] factor had increased hundreds, and sometimes over one thousand percent! None of these increases had been illustrated in the ledgers at point-of-sale. Note: I just read about a nearly identical case with a second insurance company last week. The takeaway- read the contract for terminology and features that you may be unfamiliar with; make sure you understand it. If you don’t, ask, and if you still don’t: maybe you shouldn’t sell it.
Sheryl Moore is President and CEO of the life and annuity market research firm of Wink, Inc. Her company provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at firstname.lastname@example.org.