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Illustrations Lure Clients to Pick Dangerously Low Premiums

We all know that many large carriers are raising or attempting to raise the monthly deduction rates (also referred to as cost of insurance, or COI) for older universal life and (in rare cases) variable universal life policies. The increases are huge and the impact on policyholders, especially those over the age of 75, is extremely painful.

You might assume that the increases are related to poor mortality results, since this is what carriers have been telling us for many years. But you would be wrong. In fact, mortality is not even a factor in the vast majority of cases. So, you say, “It must be interest rate compression.” And, while low interest rates are a problematic for all carriers, interest spreads are only one component of the actual issue.

The root cause of this grab for cash from your clients’ accounts is something the industry created: spreadsheeting. This sales technique, which commoditizes life insurance by encouraging clients to choose the least expensive illustrated coverage, is the real cause of the industry’s problems.

This is an institutionalized problem that starts with carriers and ends with client disappointment. Let’s face it; no one wants to spend “too much” for insurance. But showcasing premiums as if you were presenting a beauty pageant does more harm than good.

Over the last few years we have reviewed large numbers of policies. All of these policies have what seem like egregious increases in the monthly deduction rates (MDR). At first, we were mystified by the huge and seemingly random increase in rates. I would not be surprised to find that some of the carriers just backed into these rates by deciding how big a profitability hole they were trying to fill, with no actuarial justification.

But as we spent more time reviewing policies and trying to give our best advice to aggrieved policyowners, we could not help but notice an undeniable pattern. The largest increase in actual premiums required to continue coverage is always to policies that have been underfunded. In one case, we reviewed a policy where the client (who ironically is an insurance agent himself) paid only the minimum required COI cost from the inception of the policy. He is now 76 and has paid $360,000 for a policy with a $300,000 death benefit, and continues to pay to limit his losses. This is not where you want to be after 20 or 30 years of payments.

However, this pattern tracks perfectly with the actions of a few carriers who made it clear that they were trying to make money on policies that were severely underfunded by premium financing and life settlement schemes. The life settlement industry may be the poster child for this behavior, but make no mistake, the blocks of business on which these rates have been raised are full of everyday policyowners who paid what the agent told them at the inception of the sale, or less, without regard for the notices they’ve been getting for years about lower and lower interest rates.

And while the debate about whether the MDR increases are justified continues in the courts, I think we need to step back and place the blame where it really rests, the industry’s addiction to selling insurance as a commodity and the public’s complete lack of understanding of our products.

Probability Funding

Carriers are notorious for pricing their policies using competitors’ products as the benchmark. Every carrier obtains competitive data and constructs their products to be at the top of one grid or another. Whether it’s the least expensive premium for a death benefit product, or the highest income from an indexed universal life policy, spreadsheeting is rampant and the industry has made no effort to stop it. This is a particularly pernicious problem for current assumption non-guaranteed UL and IUL products.

You could reasonably argue the industry shot itself in the foot and therefore should be required to suffer through these periods of interest rate compression with lower margins, regardless of the actions of the policy owners. And I would agree. The contracts give the client the right to pay whatever they want; therefore, the carriers are obligated to live by the terms of the contracts.

And let’s not forget the ravenous appetite many large carriers had for stranger-owned life insurance, investor-owned life insurance and other schemes they knew would come back to haunt them but took on anyway.  It’s a zero-sum game. In this case, the loser is your client.

While carriers are not likely to address this issue, we can and should do something to prevent this from happening in the future. Fortunately, a solution is much easier than you might think.

Here are few suggestions that may not be bullet-proof, but are sure to minimize future pain:

  1. Stop spreadsheeting! The lowest premium policy is also the least likely to succeed.
  2. If you must spreadsheet, encourage your clients to pay more than the minimum premium the illustration system calculates. This applies to income scenarios too; lower the expected income, and don’t illustrate the maximum allowable number.
  3. Ask carriers to come clean about nonguaranteed “black box” products. None of these have ever delivered their illustrated promises. If you can’t understand the scheme or you can’t explain it to your client in clear English, don’t sell it!
  4. Illustrate using a rate that can be reasonably achieved. The AG 49 rate is not a scientific number and is often overstated.

I can say with a high degree of confidence that the increased COI rates we have been seeing are directly related to the high percentage of policies that have been and continue to be severely underfunded.

Based on our internal analysis, most of these problems could have been avoided if clients had paid roughly 10 percent more than what was illustrated at the time of sale. That’s not a scientific number, as all policies are not created equal. But it’s a good start.

Minimum funding will continue to haunt the carriers for decades to come, and maybe longer if the carriers don’t stop encouraging sales using illustrated pricing schemes that encourage a race to the imaginary bottom. This means you cannot trust any carrier illustration unless all components are guaranteed.

Right now, all of the action in MDR increases centers around UL policies where the components are not guaranteed. But, to be fair, UL is a very understandable product when compared to IUL or VUL.

Imagine the carnage a decade or two from now when your clients with overfunded IUL find out the income they were counting on is a mere fraction of what they expected. Imagine a world where market volatility makes the cost of options so expensive that cap and participation rates are severely reduced, and consider that the MDR is not guaranteed either.

This is not conjecture. These are legitimate risks that could cause carriers to consider another round of MDR increases. Carriers are not concerned about this, but you should be.

Asking your clients to pay 10 percent more than the lowest illustrated rate may not solve this problem entirely.  But if this round of increases is any indication, the additional premium will materially affect the outcome for the better.


Ron Sussman is founder and chief executive officer of and CPI Companies. He counsels high-net-worth individuals through risk management analysis and life insurance planning strategies. Ron may be contacted at [email protected] [email protected].

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