Imagine that you were leasing a car and you had narrowed your options down to two; a Honda and a Ford. Both cars had everything you wanted, but for some reason the Ford was more expensive. So you lease the Honda for three years. After six months, Honda informs you that they mispriced the lease, and in fact you must now pay far more than the Ford would have cost. Such a situation would seem at best unfair and at worst a “bait and switch” where Honda was able to get you to forego the Ford and purchase the Honda knowing full well that it would increase the price later.
By analogy, this is what is happening in the insurance industry. Over the last five months, several insurance companies, including Voya and AXA, have announced increases to cost of insurance rates ("COI") for certain outstanding universal life insurance policies. These increases, some which are in excess of 80%, allegedly were made to address the anticipated future costs for providing the coverage.
Interestingly, a group of life insurance companies have specifically stated that they would not raise rates, including Met Life and Prudential. For many years, quality insurance companies like New York Life have maintained that their pricing, while more expensive than some competitors, was appropriate given realistic assumptions about mortality and investment returns. Firms like AXA, by contrast, undercut the competition on price to place insurance. Now that the assumptions in fact have proven not to be true, they pass the cost of that along to consumers.
In an appearance on Wall Street Week earlier this month, the CEO of Northwestern Mutual, stated, “I do think there are a number of carriers that are making unrealistic assumptions around investment returns in their universal life products and unfortunately the way the product works somebody is going to be on the hook to make that up” (emphasis added). With these cost increases, the COI Increase Companies have decided that the policy holders are “going to be on the hook to make that up.”
Like the hypothetical Honda purchaser above, many consumers would have purchased insurance from better quality carriers had the prices been comparable or if they had any notice that the COI would increase. Instead, they purchased insurance from carriers who now seek to change the game in mid-stream to increase profitability. This type of bait and switch should not be allowed to stand and consumers should demand better.
Meanwhile, if you are one of the seniors who has been notified of a pending increase in your life insurance premiums, there may be better solutions than accepting a reduction in your benefits or just surrendering the policy back to the insurance company. One of those alternatives is a life settlement, where a consumer sells the policy to a third-party investor for an immediate cash payment. To learn more about this and other options available to consumers who no longer need or can afford their life insurance policies, visit the “Life Policy Owners” section of the LISA website.
About the Author:
Dan Young, CLU, ChFC, CASL, is the President of Magna Life Settlements, Inc., a well-established life settlement provider focused on maintaining transparency, risk management and rigorous process control in the purchase of life settlements. Magna is owned by Vida Capital, a vertically integrated asset management company providing longevity contingent investment solutions to institutional and individual investors. Dan is the Vice President, Asset Management and General Counsel of Vida.
In addition to his role at Vida, Mr. Young is an adjunct professor of regulatory law at the University of Texas Law School, Board Member and Chair of the Legal Committee of the Institutional Longevity Markets Association (ILMA), Board Member of the Life Insurance Settlements Association (LISA), and a frequent speaker at life settlement industry conferences. Prior to joining Vida Capital, Mr. Young was the President and CEO of New York Life Insurance Company’s Broker-dealer and Registered Investment Advisor. Mr. Young graduated from Stanford University with Honors and Distinction and from the University of Chicago Law School with Honors.