Breakthrough in Life Insurance Chronic Care Benefit

As a mater of course permanent life insurance coverage now offers either a Long Term Care (LTC) benefit or what is called a Chronic Illness Benefit.  Their features are about the same, but the major weakness of Chronic Care riders has been that the condition had be expected to be permanent.  Many conceivable LTC occurrences, involving the loss of 2 out of the 6 activities of daily living, are temporary and recoverable, for example with a major auto accident, a broken hip or a moderate to severe stroke.

AIG group announced that “thanks to a recent change in accelerated benefit regulations; which allowed the permanency requirement to be removed from chronic illness riders” that American General Life with their Chronic Illness Rider will allow non permanent conditions.  That’s a huge benefit enhancement!   Well done AIG for pioneering this expanded benefit.  I wonder how many other carriers will follow suit and broaden their definitions of chronic care to allow recoverable condtions.

Life Insurance Opens Up for Those HIV-Positive

Endurance, Frank HurleyBeing HIV-positive used to be an automatic decline for life insurance except for guaranteed acceptance products. HIV-positive people now may be able to qualify for life insurance through Prudential and John Hancock.  Prudential offers 10 and 15 year term.

John Hancock’s recent announcement has more to offer.  People ages 30 to 65 may qualify for up to $2,000,000 in coverage for all products, if the applicant is able to show “a favorable and stable clinical course.”

I would surmise favorable applicants will demonstrate, besides good lab numbers, diligent compliance with their treatment regimen.

 

 

 

 

 

LTC Insurance Woes make Hybrid Life/LTC Look Even Better for 2016

The news last week that Genworth Financial Inc. suspending life and annuity sales was a regrettable milestone in the company’s history.  Genworth and First Colony Life Insurance Company before it had a commendable record for high quality life insurance products: the $25,000 no lapse guaranteed UL and the Colony Term UL come to mind.  Reading recent Fitch’s ratings downgrade outlines the difficult predicament the company is in.  Losses in their LTC insurance business have had a significant impact.

Long Term Care, LTC, insurance has proven hard to price correctly. Part of the problem was due opened ended benefit rich plans being sold with 3% or 5% compound inflation protection. The real problem from a consumer’s point of view is that traditional LTC insurance policies are subject to rate increases and some over the last decade have been significant.  It’s hard to justify risking the policy will someday by priced out of a retirement budget.

One viable avenue for coverage still exists: hybrid life insurance plans with either an LTC rider or a Chronic Illness Rider.  The consumer can lock into a lifetime fixed premium.  Granted the benefit is fixed or limited by the plan’s face amount, but at least the consumer can be certain of the coverage’s scope at a fixed price and be able to derive a benefit from the policy one way or another, either for long term care expenses or a life insurance death benefit.

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Universal Life three structure options

Advice for a client in his early 60’s

There are basically three ways to structure Universal Life (UL) for estate planning:
1.  Lock in Highest death benefit at the lowest cost, lifetime coverage with Guaranteed UL

2.  Build cash value with a UL level death benefit for potential premium payment flexibility in future policy years

3.  Build cash value with a UL  increasing death benefit (option B)  for potential partial cash surrenders and premium payment flexibility in future policy years.

$100,000  Face Amount, male, age 63, best health rate, sample quotes
1. $152.40 monthly  Guaranteed UL
2 $195.48 monthly,  UL, cash value year 20 $41,501, non guaranteed
3. $304.74 monthly, UL, cash value year 20 $74,086 and death benefit $174,576, non guaranteed
Hubble-Views-Galaxy-LO95-0313-192

Indexed UL illustrations (IUL) reforms: the elusive level playing field

Rule changes commence on September 1st, 2015 for Indexed UL (IUL) illustration. The maximum illustrated rate for the S&P 500® Index will be capped based on a formula called the Benchmark Index Account, a rolling formula of all possible 25 year periods over the last 66 years. The formula for look-back periods used to be up to the carrier, invited cherry picking of the most favorable data sets, and fostered wide discrepancies on the maximum rates.

This rule change does not truly standardize interest rate assumptions. Using the same historical benchmark one might reasonably presume the illustration interest rates would be the same for every product. Nope. Take for example new S & P 500 annual point-to-point interest rate assumptions for three different companies for their products offered.

S & P 500 Annual Point-to-Point

Life Company A:
6.86%  product 1
6.45%  product 2

Life Company B:
7.17%  product 1
7.47%  product 2

Life Company C:
5.02%  product 1
6.00%  product  2
5.75%  product 3  survivor
6.00%  product 4

The interest rate assumption differ because the formula is partly derived the product’s current annual cap and those cap rates vary among products. Cap rates offer no fixed reference point because they are subject to change at the carrier’s discretion. At best there’s a guaranteed minimum cap rate of a few points. A current 13% cap rate could conceivably be reset to 3% twenty years from now. Cap rates have generally dropped at least a point or two since I began to actively monitor them in 2011 on my website.

Regardless, a higher interest rate does not necessarily project the highest cash values or death benefit. Cost of insurance charges affect cash value accumulation. Results vary considerably depending on assumptions. Projections based on such wide variables over long periods of time should be viewed with caution, not as hard values.

To help level the playing field, consumers need to request from agents competing product illustrations using the exact same interest rate assumption. At least one comparison should be at a low rate. For example a consumer should request illustrations run at 5% to compare the premium and cash value accumulation after 10, 20 and 30 years. Consumers should request multiple illustrations. Complete illustration are easy for agent to run and email, pdf format, to allow adequate time for someone considering purchasing life insurance to review. It’s useful to solve an illustration for $1 cash value at age 100, compare the premiums and run a second illustration with the premiums being equal. It’s informative to compare competing product illustrations at really low interest rate assumption like 3%. These sort of illustrations, squeezing out the upside maximum results, reveal better the underlying cost of insurance.

This IUL rule change is welcome reform, but by no means establishes a default starting point for comparisons. The new rules help make a level playing field, but it still requires effort to line up the teams. Ultimately, what’s required above and beyond is a comparison of the product and carrier’s underlying strength rather than tweaking out the highest maximum cash value accumulation.

Legislation to Bury Unclaimed Life Insurance Benefits

How does a life insurance company know that the policy holder has died?  Traditionally it has been the beneficiary’s obligation to notify the carrier and file a claim. Carriers require a death claim form and a copy of the death certificate be submitted.  But what if the beneficiaries are unaware of the policy?  Unfortunately that has been a real problem. Thousands of life insurance policy holders did not have adequate estate planning.  Their beneficiaries did not know the policy existed or were no longer alive.  Millions of dollars of life insurance benefits have never been paid.

Life insurance carriers have not been proactive making good on life policies when not notified of a claim.  They have had no economic incentive to pay those claims. However the states where the policy owner resided have an incentive to take over the unclaimed money after a period of time to allow the death benefit to earn interest for them.  Multiple states life Florida and California have reached settlements with the companies. It was obvious many insurance companies had set a double standard.  Since it was in their economic interest to stop paying checks for annuity policy holders, they set up a system cross referred the social security death master file, but never bothered to set up the same system for their life policies holders.

These settlements of state lawsuits has helped reform the system immensely, but a rear guard has done their best to challenge reform and do as little as legally required.

Consumer protection may depend on what state you live in.  Legislation has been passed or proposed in states that is more conducive to life insurance carriers’ interest.  Note how this shielding process is now being proposed in North Carolina.

In recent years, roughly 20 life insurance companies, in national agreements with states, have promised to identify dead policyholders and pay out their policies or turn the money over to the states as unclaimed property. But other companies are petitioning state lawmakers across the country to pass a law that would shield them from having to do the same thing.

North Carolina state Treasurer Janet Cowell leads a fight to protect beneficiaries.  Quote via NC Policy Watch article.

SB 665 is an attempt by one insurance company, to greatly limit the Department’s ability to audit by excluding whole categories of policies from the audit requirement. Specifically the legislation would exclude policies called “industrial life policies” which comprise the great majority of benefits that have gone unpaid by these companies. This exclusion will result in tens of thousands of loved ones never receiving the death benefits their parent, grandparent, or spouse has already paid for. 

This legislation is little more than a money grab. Other companies in the industry have had no problem complying with statutory audit requirements.

Kemper Corp. has lead an effort to block or restrict reform.

If you’re wondering if you are a beneficiary to a life policy, there are some basic steps to take for free and others for more extensive follow through.  MIB is a good source for this.

Notes:  May 2015

Retroactive Statutes:
Iowa, Idaho, Maryland, Nevade, New York, North Dakota, Rhode Island and Vermont.

Prospective statues or interpreted to be prospective only:
Alabama, Arkansas, Georgia, Indiana Kentucky, Mississippi, Montana, New Mexico, Tennessee and Utah,

Forever 60, notable individuals who died at age 60

Theodore Roosevelt in 1918
Theodore Roosevelt in 1918

Amerigo Vespucci,  Italian explorer

Bill Graham, American concert promoter, The Fillmore, helicopter crash

Gary Cooper, actor, prostate cancer

Leon Trotsky, Russian revolutionary, writer, assassination

Robert Lowell, American Poet, heart attack

Stephen Jay Gould, American scientist, author “It’s a Wonderful Life”, lung cancer

George S. Patton, US Army General, complications auto accident

Theodore Roosevelt, 26th US President, writer, explorer, naturalist, blood clot lungs, January 6, 1919

Van Heflin, actor, heart attack

Syd Barrett, English musician, Pink Floyd, pancreatic cancer

Buddy Miles, US musician, congestive heart failure

Sergio Leone, Italian director, heart attack

Mahalia Jackson, gospel signer, heart failure, diabetes

Calvin Coolidge, 30th US President, coronary thrombosis

Walter Tetley, American voice actor, voice of Sherman in The Bullwinkle Show, after never fully recovering from motorcycle accident injuries

Jim Carroll, poet, musician, author “The Basketball Diaries”, heart attack

Peter Finch, British born Australian actor, heart attack

Bob Fosse, dancer/choreographer, heart attack

Amanda Blake, actress, Miss Kitty on Gunsmoke, AIDS

James J. Kilroy,  shipyard inspector  “Kilroy was here”

Anthony Perkins, actor, AIDS

Benedict Arnold, turncoat general American Revolutionary War, dropsy

Susan Strasberg, actress breast cancer,  along with 10 other notables due to breast cancer

Winthrop Rockefeller, governor Arkansas, cancer of the pancreas

Murray “the K” Kaufman, New York City disc jockey, cancer

R. J. Reynolds, III,  emphysema

Allison Doupe, American neuroscientist, cancer

John J. McGraw, baseball player and manager NY Giants

Shemp Howard, actor and comedian, the Three Stooges, heart attack

Tom Mix, American Actor, car accident

Peter Grant, English, manager Led Zeppelin, heart attack

John Constable, British artist, apparently heart failure

 

Is Indexed Universal Life (IUL) Better Than UL?

Are Indexed Universal Life (IUL) products really better than regular UL?  Does the additional cost really justify an IUL?  For example take:

Male, age 52, preferred best rate class, $250,000 face amount

step #1.  Run a UL illustration solving to endow at age 100, increasing death benefit option.

Note: endow is worth it’s face amount, a $100,000 policy endows when it’s cash value equals $100,000.  Whole Life, the best quality par plans, are designed with increasing face amount and guaranteed to endow at age 100.  That high quality standard is what all UL and IUL  plans should be measured against.

#1 results:
UL: $5,000 annual premium  (rounding to nearest hundred)
Year 20: $121,000 cash value, $371,000 death benefit

Step #2. Run an Indexed UL illustration using the same assumptions, except interest crediting at one basis point, 1%, above the UL’s current interest rate.

#2 results:
Indexed UL: $6,400 premium
Year 20:  $157,400 cash value,  $407,400 death benefit

Note: The Indexed UL requires $1,400 more premium to build sufficient cash value to endow at age 100. Granted the IUL shows higher cash value and death benefit in year 20, but the premium is much higher.

Step #3. run an illustrations of the UL at the same premium as the IUL

#3 results:
UL: $6,400 premium
Year 20:  $164,500 cash value,  $414,500 death benefit

This UL product has better non-guaranteed projections than the Indexed UL, assuming a 4% interest rate and the Indexed UL a 5% interest rate.  Most agents probably quote an Indexed UL assuming interest rates of 7% or 8%, but that, to put it mildly, is very presumptuous.  All Index UL illustrations with interest rate assumptions being the same each and every year are highly improbable. That’s just not how equity indexes perform; they go up and down.  Index UL may have higher upside potential than a UL, but the carrier’s fundamentals are the same, and the hedging cost to cover and Indexed UL’s upside potential typically shows up in its cost of insurance.

 

Curt Herrmann - Sommermorgen

 

 

 

Transamerica withdraws TransACE products

Transamerica withdrew their TransACE life insurance products on February 4th citing a difficult interest rate environment.  Carriers at times discontinue or change products, but Transamerica’s decision was unusual in that they stopped processing current applications.  Usually carriers give prior notice and accept applications up to the cut off date and give a processing deadline for submitted applications, but here Transamerica even pulled the plug on current applications except where the 1035 cash exchanges had already been sent to the existing carrier, or those out for delivery.

The low interest rate environment is an ongoing concern for life insurance carrier.  Here’s an overview from the NAIC, National Association of Insurance Carriers on its impact.

How to know this was coming?  Transamerica has strong independent financial ratings. They have a 92 Comdex ranking which is a composite percentile rank of all carriers. However, Fitch had given Transamerica a negative outlook in February, 2014, but revised it to stable in October.

Take Away

Transamerica’s abrupt decision to withdraw TransACE probably did applicants a favor, given the encountered difficulties.  Applicants can simply apply somewhere else using the same paramed results and medical records.  Current TransACE policy holders may wish to reevaluate.  One may surmise the plan’s projections were not favorable.  Considering replacement calls for careful review; the burden of proof for replacing should be fairly high. Requesting an inforce illustration from the carrier is the first step.

Choosing a carrier is a key component in selecting a permanent life insurance policy.  I favor mutual life companies or those privately held over publicly traded stock companies. Stock companies have to subject the pressures of shareholders; publicly held or mutual companies do not.

The product affects the importance of carrier choice.  Whole life is the traditional province of mutual companies. With guaranteed Universal Life (GUL), the lowest premium with a lifetime no lapse guarantee is the key driver.  The company offering a Guaranteed UL are on the hook for the guarantee. How the carrier performs over the time is not of strict importance, assuming the historical resiliency of the life carriers.  With a current assumption UL or an Indexed Universal Life (IUL) consumers are advised to closely review the relative merits of the carrier’s financial strength, since the policy’s performance will depend on interest crediting and cost of insurance charges.  Carrier ratings matter but also trends indicating stability and financial strength.  Veteran life insurance agents since the Great Recession of 2008 have witnessed many.

Vinterlandskab med Brabrand Kirke: Wikipedia Commons public domain