To Guarantee or Not to Guarantee for Life
Permanent life insurance is designed to provide financial security for beneficiaries after an insured person passes on. As insurance carriers retain sufficient assets to pay death benefits while also making a profit, the products they offer have evolved as economic circumstances have changed. The challenge for the industry is to safeguard the future for the insureds’ beneficiaries while keeping pace with today’s life insurance products.
How we got here
Michael Tessler, President of St. Louis-based Brokerage Unlimited, Inc., provides this historical perspective. “For many years, the primary permanent life insurance product was whole life,” he said. Because whole life was generally associated with a poor return for the policy owner, universal life (UL) was introduced in the 1980s. “This allowed parties to enjoy a better rate of return and allowed the return to be an interest rate instead of a dividend, which gave some premium flexibility and the promise of a lower premium for permanent life insurance,” he recalled.
At that time, interest rates were exceptionally high and fixed life insurance products like this had very high interest rates associated with them. After interest rates declined severely, performance of these policies was far less than what consumers wanted.
The successor product was variable universal life with performance tied to stock market returns instead of interest rates. “Although the product became very popular, the many dips in the market made for major league disappointments,” Tessler said. “The maximum allowable yield on a variable product was an inappropriately high 12 percent.” When these products also failed to perform as buyers had expected, the result was more unhappy buyers.
These policy performance failures became a problem for fiduciaries and trustees who had a legal responsibility to do the right thing for the trust owned life insurance under their supervision. “They wanted a product with a guaranteed premium and guaranteed death benefit,” Tessler explained. “They did not want to be told a few years later it had not performed as expected and they would have to spend a great deal more money on premiums than anticipated. For years trustees have been managing ill performing life insurance policies for which the trustee is personally liable. The trustee has an obligation to the beneficiaries of the trust to pay the death benefit. They need to know by paying this premium the death benefits will be there when the insured dies.”
NLG UL is Introduced
To meet the needs of trustees and others seeking a more predictable permanent policy, carriers introduced no lapse guaranteed universal life (NLG UL). These policies offer a guaranteed premium and a guaranteed death benefit but have a low cash value. If premiums are paid, the policy remains in force for the insured’s lifetime no matter how long that is. These policies keep the out of pocket premium as low as possible and the death benefit level and everything is guaranteed. As long as the owner pays the premium, the policy continues and will pay the full death benefit. These policies are extremely attractive to people who have been burned by other products.
A challenge for carriers offering these products is that they come with additional reserve requirements from regulators. “The lifetime guarantee requires what the industry refers to as ‘extra reserves,’” noted Gene Lunman, MetLife Senior Vice President. “Regulators want to make sure the companies providing the guarantee are putting aside enough capital to support that guarantee. In these tougher economic times, the cost of capital relief to carriers has increased. A second element affecting carriers is we’re providing these long term guarantees based on interest rates over a lifetime. Those rates now are at historic lows. Generally across the industry, the prices for lifetime guarantee products are increasing.”
Pricing for NLG UL policies is also based on the expected lapse rate, which is low for these products, Tessler noted. People who choose a lifetime guarantee policy normally want to continue that policy for life so there is little expectation of financial benefit from lapses for insurance companies.
Enter Age Limited UL
These increasing prices for NLG UL policies have led to a newer UL product, age limited NLG. In these policies, the guaranteed benefit ends at a set age selected by the client, typically 90 or 95 years old. The premiums for these age limited policies are lower than for those without age limits, with the difference ranging from 5 to 20 percent.
The age limit does not necessarily mean the policy owner will get nothing if the insured lives beyond the age set in the policy. “Most age limited policies offer the possibility for the policy to continue beyond the limit but without the guarantee as long as enough money is coming in to cover the premium,” Lunman said. However, that premium could increase significantly once the age limit is reached, perhaps so much the client would not want to pay it.
While age limited policies may be continued for insureds that live past the age set in the policy, the cost may not be affordable. “The premiums may be prohibitively expensive, as much as 10 or even 20 times the previous premium level,” noted Hank Ramsey, Vice President of Life Product Strategy for Prudential.
AXA Equitable offers an age limited single life policy to age 90 called Athena UL which was introduced in March 2009. David O’Leary, AXA Equitable Executive Vice President of Financial Protection, said Athena UL provides flexibility for consumers as their financial protection needs change when moving through different life stages. The policy has progressive underwriting and a series of riders for special concerns. For example, “we offer a long term care rider that is an acceleration of the death benefit,” O’Leary said. A no extra charge charitable legacy rider pays at death one percent of the face amount to the insured’s charity of choice in addition to the death benefit. For insureds that live beyond the age limit, he said, “If the policy is still in force, it will pay the full death benefit if the owner is still paying premiums and/or the policy has sufficient cash value.”
Athena UL is designed to build strong cash values which can allow owners to skip or reduce a premium payment based on their circumstances or roll the cash value into a new product if needs change at a later date. O’Leary said the product has been well received, with good support from BGAs.
Since there are many different product designs with age limited policies, it is very important for the client to understand what happens after the guarantee period ends. Another key difference is that age limited products offer more cash value than the typical lifetime guarantee product allowing owners to borrow that cash or take money out of the policy if desired.
“Choosing a NLG UL policy is often an irrevocable decision,” said O’Leary. “The owner must pay the whole premium no matter what happens although the premium will never change. Depending on the client’s needs, a more flexible solution that builds cash value may make sense. “Note that some carriers have added cash value features to their NLG UL policies.
How Important is the Guarantee?
“Guaranteed UL continues to be a substantial part of industry UL sales,” Ramsey said. “LIMRA reports the amount of NLG sales was almost 50 percent of total UL sales in the first quarter of 2011. For Prudential, the percentage was even higher. We believe the presence of a death benefit guarantee is critical to the appeal of UL products.”
Lunman thinks part of the popularity of lifetime NLG UL products may have been based on attractive pricing. Now those prices are going up and he feels there will be more shifting to the age limited policies as a result. “If you had to pay an extra 10 to 15 percent for a lifetime guarantee and the client thinks he won’t live past 90, he will choose to save money,” he suggested. “If for the same price you can get a lifetime guarantee or a policy with an extension option, the client will not want an age limited policy. Carriers are struggling with the financial issues of lifetime guarantee products so many other products are being introduced.”
“It is expensive for the companies to provide the guaranteed coverage customers want,” Ramsey agreed. “In recent years, many companies have withdrawn or significantly revised their NLG products to increase prices or restrict availability. Then again, Prudential and some other companies have lowered prices and some other companies have just begun to offer NLG products.”
Circumstances Determine Best Option
Each case must be evaluated individually to determine which type of policy is appropriate. Even though the no age limit policies are typically based on a 121-year lifespan, “most people won’t make it to 90, given statistics of the mean ages at death,” Tessler said. “But as a trustee, you want to avoid meeting the beneficiaries of a trust in the unfriendly offices of a lawyer. When people sue, they sue for the death benefit if the policy is not paid.”
“If the sole concern is ‘I want life insurance where I know how much I have to pay and there will be a death benefit paid by the carrier,’ that’s when you pick the lifetime guarantee policy,” Lunman said. “The lifetime guarantee UL product is a superior product for estate planning where people are not concerned about cash value or access to cash value. They want to be sure they are leaving assets at eventual death. If looking for pure income replacement for eventual death or support in retirement, then other products might be better. It depends on the primary purpose of purchasing life insurance. That’s why MetLife offers all types of life insurance because we recognize every client’s needs are different.” “Perhaps there are some customers who only need coverage to age 90 or 95, and after that point their family or business need for life insurance ends,” Ramsey said. “However, I suspect for most customers, the insurance need is really for their lifetime, and they are taking the gamble they will die before age 95 in exchange for less expensive coverage. The problem with this approach is that the possibility of living past age 90 or 95 is much higher than you think, and the risk of outliving your insurance can be pretty high. Clients who purchase insurance expecting to provide benefits to their loved ones may find they have purchased coverage they cannot afford to continue when they need it the most. ” He said the Society of Actuaries September 2008 simple life expectancy calculator indicates a healthy 65 year old male customer’s chance of living to 95 is almost 30 percent and a healthy 70 year old female customer’s chance of living to age 90 can be 50 percent. He encourages life insurance shoppers to research their likely life expectancy online before deciding what type of insurance to buy. See the information in the box for links to life expectancy calculators. “There’s no always or never,” Tessler added. “To say that a trust owned permanent life policy should be lifetime NLG is incorrect. Say the insured is not so healthy, they are ratable and will be charged an extra premium due to poor health. In that case, their life expectancy is very different from someone who is in pristine health at 65. Therefore the worry over whether this person will be around at 114 is not a concern if their health is impaired at 65. A guarantee of shorter duration might be appropriate in that circumstance. “We’re in a business of mortality,” said Tessler. “We know how long these people are going to live. That’s why selling an age limited policy to a healthy person of 65 may not be prudent. There are going to be a certain percentage of deaths from unexpected means, but we have to look at what we’re doing here. We’re shifting risk from ourselves to the insurance company. As a trustee, why would I want to assume my client won’t survive? I have taken on the responsibility for managing my client’s assets and they are assuming the insurance will pay out millions to the people they most care about when they die. Why would I take chances? The trustee is not paying the premiums. They are being paid by the grantor, who is usually the insured. Most insurance you buy, like homeowners insurance, you don’t ever expect to collect on. When you buy permanent life insurance, you’re buying it fully expecting a claim to occur because death is inevitable.”
Perspective Magazine \ NAILBA \ Brokerage Industry Insights \ September/October 2011 Issue
Jean Feingold is a Gainesville, FL-based freelance writer whose company, Business Communicators, celebrated its 20th anniversary in 2010. Her work has appeared in trade magazines in the petroleum marketing, trucking, construction, restaurant, interior design, airport, manufacturing, and other industries. She also serves as PR consultant to the University of Florida’s Geological Sciences Department. She is author of the book, “Creating a Farmers Market: Starting from Nowhere.” She holds an MBA in management from the University of Florida and a BA in psychology from New College.