The following is a post by MPFJ staff writer, Toi Williams, who is a professional personal finance blogger of American Consumer News. She has backgrounds in personal finance, sales, and real estate.
Many people holding universal life insurance policies received an unpleasant surprise this year, as the premiums for many of these policies skyrocketed. Some consumers who purchased their policies decades ago saw their premiums increase by 20 – 40 percent, leaving them with few options other than to pay the higher cost or let their insurance policy lapse. Policyholders are understandably frustrated, with some taking to the courts to try to halt or limit the premium increases.
So why are the premiums for universal life insurance policies rising so quickly?
The main reason for the dramatic premium increases is the long-running, low-interest rate environment. Low interest rates lower the income insurers make from high-grade corporate bonds and U.S. Treasuries, which insurers hold to maturity. This income pays for most of the cost of insurance. As life insurers’ assumptions about interest rates are falling short of economic reality, it becomes harder for them to pay the benefits for the policies. Insurers have few options to deal with the shortfall other than hiking the amount the policyholder pays into their policies via premiums.
Universal life insurance policies are already more expensive than term life insurance policies because they typically last for the policyholder’s life, guaranteeing a death benefit regardless of when the policyholder dies. These types of insurance policies also have a savings component that accrues value over time, making them attractive for use in saving for retirement. The policies were widely popular in the 1980s and 1990s, when interest rates were higher. In the early 1980s, when interest rates rose to about 15 percent, universal life insurance policies accounted for a quarter of all life insurance sold to individuals.
Premiums for universal life insurance policies are based on multiple factors, including interest, mortality, taxes and expenses associated with the policy. Because of the numerous variables that go into calculating the premium price, the premiums can vary over the life of the policy. Many of the customers affected by the latest rate hikes say that their monthly payments on the policies rose before, but always in relatively small increments.
Some universal life insurance policyholders who bought their policies from the Transamerica Life Insurance Company were notified last year that their rates would increase by an estimated 38 percent. Other companies, including the AXA Equitable Life Insurance Company and Voya Financial, have also been notifying customers of large rate increases for universal life policies. The National Association of Insurance Commissioners is now examining whether the increases were justified.
What options do holders of these universal life policies have?
Universal life insurance policyholders are left with few options to cope with the premium increases. If policyholders don’t pay the higher rate imposed by their insurer, the higher deduction amount will eventually deplete the policy’s cash value account, and the policy will lapse. For policy holders that are near retirement, finding affordable replacement policies would be difficult now because they are much older.
Holders of universal life insurance policies could reduce the death benefit of their policy, increasing their period of coverage in return for less of a payout. Policyholders also have the option to surrender the policies and take whatever cash value remains. However, taxes would probably be owed on the cash, reducing the amount the policyholder receives even further. Roughly a decade of low-interest rates has already made it hard for savers trying to preserve their nest eggs in low-risk fixed-income investments.
In theory, premiums could drop if a sharp and sustained increase in interest rates occurs. However, there is no indication from the Federal Reserve, which sets benchmark interest rates, that rates will be rising anytime soon. The agency raised interest rates by a modest amount last December after nearly a decade of historic lows, with further rate increases expected throughout 2016. Subsequent economic headwinds have delayed those plans for the foreseeable future.
Breaking down the Transamerica lawsuit
Angry consumers have filed a lawsuit against Transamerica over the premium increases imposed on their policies. The lawsuit, which is seeking class action status, accuses Transamerica of trying to “impermissibly shift to the policyholders its own, independent obligation to make good on the interest rate guarantees in the policies.” Plaintiffs allege that the premium hikes constitute a breach of obligations under the policies and have led to damages against contract holders.
The cost increases by Transamerica began in August 2015 on universal life insurance contracts sold in the late 1980s and early 1990s. Most of these policies guaranteed an interest rate of no less than 5.5 percent annually. The complaint says that Transamerica raised monthly charges by as much as 38 percent “to subsidize its cost of meeting its interest guarantee, to recoup past losses on the policies and on its investment portfolio, and to make the policies more profitable by inducing policy terminations by those policyholders who could not afford the increase.”
The lawsuit, filed in Los Angeles, alleges that Transamerica breached its contract and acted in bad faith. It notes that the insurer is raising its rates as the time nears when policyholders will begin collecting on the policies. Harvey Rosenfield, founder of Consumer Watchdog and one of the lawyers working on the case, said in a statement, “After taking their premiums for many years, Transamerica is attempting to dump its elderly and retired policyholders at a time in their lives when they are counting on the policies.”
A Transamerica spokesman says that the increases were permissible under the policies and that no policyholders are being charged more than the maximum rates specified in their policies. Another said the firm has communicated with policyholders about expected changes based on what it forecasts future costs to provide coverage will be. Further rate increases can be expected in the future if interest rates remain low.
How about you all? Are you familiar with or have any experience with universal life insurance or know someone involved with the Transamerica lawsuit?
Share your experiences by commenting below!
***Photo courtesy https://www.flickr.com/photos/68751915@N05/6551520247/
