One of the most pressing problems taking place in the life insurance industry today is the fact that an increasing number of non-guaranteed life policies (approximately 45 percent) are expiring prematurely. This is primarily due to 20 plus years of reduced sustained interest rates coupled with neglect on the part of the owners/trustees of these policies, who weren’t aware that they should have been increasing their premiums as interest rates kept declining. There’s one culprit and missing ingredient to cause a “perfect storm,” threatening to greatly accelerate the increasing numbers of life policies that are already expiring prematurely. I’m referring to the insidious strategy recently employed by the insurance industry: increasing the Cost of Insurance.
If you purchased an auto insurance policy last year and the insurer realized that it needed to increase the premium, it would send you a bill for the increased price, and you could then decide to pay the higher premium or shop for similar coverage elsewhere. That’s the way you would expect it to work in the life insurance industry as well, but often it doesn’t. Rather than the insurer providing you a bill for a higher premium, it sends a bill for the same cost despite the fact that it’s increased the internal COI. Since the insurer has already been contractually approved to increase these costs, it’s not required to provide any further notice to the consumer.
Shortened Policy Coverage Period
What becomes significant is that this action, on top of the years of reduced interest rates and neglect, shortens the duration of the life insurance policy’s coverage, yet neither the amateur trustee/owner nor grantor are aware that this reduced duration has taken place. This action further exacerbates an already deteriorating situation causing non-guaranteed life policies to expire even earlier.
More than 25 years of declining interest placed a significant downward pressure on the profitability of all insurers. The life insurance Industry has decided to pull all the plugs in an attempt to return to profitability. Part of it’s strategies and decisions included what the Wall Street Journal referred to as “Insurer’s breaking a long standing industry taboo of not raising rates on existing life Insurance policies.” Although the industry had the contractual right to do so all along, what prevented these major insurers from increasing their rates in the past was their fear that increasing their internal COIs would create mistrust and adversely affect the willingness of agents and brokers to continue to do business with them. But now, a growing number of insurers either have no choice or feel that the cost of the increase is worth the risk of alienating brokers and agents from doing future business with them. Keep in mind, a distinct benefit for the insurers would be for an insured to no longer be able to afford nor want to pay a premium, as the insurer collected years of a premium but never paid a death benefit.
Protecting the Client
So how do you make certain your client doesn’t become one of the statistics, and what’s the best way to protect him against the impact of an increasing COI? Life insurance policies are sophisticated financial instruments; advisors should urge the amateur or professional trustee to make certain an individually or trust-owned life policy entrusted to them is sufficiently funded. And, if they don’t have the necessary knowledge to do so, they should obtain the services of an expert independent insurance consultant to provide the necessary skills and obtain the required information to evaluate the performance of their policy as required by the Uniform Prudent Investors Act.
Three Portals to Influence Outcomes
Amateur trustee. A relative, friend or eldest sibling living in closest proximity to the grantor, who usually has no knowledge receives no guidance from the grantor nor his advisors. Yet the trustee is 100 percent responsible for carrying out all of the duties and responsibilities of the trustee and has a 100 percent fiduciary liability if he does’t do his job correctly. Provide guidance to these individuals as they often aren’t aware a problem exists.
Professional individual trustee. Usually, this individual is the grantor’s attorney or CPA. However, many attorneys and CPAs don’t have the specialized knowledge required to properly evaluate, manage and monitor a client’s individual or trust-owned life insurance portfolio every 3 to 4 years.
Corporate/Institutional trustee. One who’s under the watchful eyes of the Office of the Controller of the Currency who’s annually audited and therefore monitors the performance and provides an evaluation of the underlying life insurance policy that’s funding a trust. Due to high costs for service, only 10 percent of policies are managed by a corporate /institutional trustee. Given this small percentage, it’s easy to understand why the other 90 percent are responsible for 23 percent to 25 percent of the current 45 percent of the non- guaranteed policies that are expiring prematurely. The problem stems from the fact most amateur trustees think of life Insurance as a “buy and hold” asset, rather than the “buy and manage” asset it really is. Many attorneys and CPAs simply aren’t aware that life insurance must be managed just like any other stock and bond or real estate portfolio. Too often, they accept the face value of a client’s policy without questioning the duration of how much longer that policy will actually remain in force as they’re not familiar with the internal workings of an insurance policy.
The matter has now caught the attention of various state insurance departments, which are now beginning to proactively address and contain these increasing COIs to make certain that the insurers stick to the letter of the law. It’s reassuring to note that various state insurance departments have stepped in and created new rules and guidelines designed to protect the consumer. However, it’s still vitally important for the amateur and professional trustee to do their job and make certain that an individually or trust-owned life policy is adequately funded, properly evaluated, managed and monitored every 2 years, so the policy won’t unexpectedly expire as a result of neglect, reduced interest rates or increasing COIs.