Myerson Wealth

Life Reimagined – Part 1

The line it is drawn, the curse it is cast
The slow one now, will later be fast
As the present now, will later be past
The order is rapidly fadin’.
And the first one now, will later be last
For the times they are a-changin’.

– Bob Dylan, from the album “The Times They Are A-Changin'”, 1964

Who would have thought the lyrics from Dylan’s 1964 anthem to change would have such prophetic meaning 56 years later? With perhaps only the exception of delivery services and manufacturers of personal protective equipment, there is no industry that is, or will be, unscathed by the present curse and all its repercussions.

If you, your clients, or anyone you know owns permanent cash-value life insurance, I implore you to read this.

The life insurance industry is by no means immune from the current crisis. However, the underlying issue for the industry is probably very different from what one might naturally assume. The concern is not the increase in mortality as a result of Covid-19 deaths (although some carriers have made temporary adjustments to their underwriting criteria during this time). Instead, the major headwind facing all life insurance carriers at this time is the further reduced interest rate environment.

When life insurance premiums are determined, there are three primary components used to calculate the premium:

  • The life expectancy of the insured
  • The costs and expenses to issue and maintain the policy
  • The income generated by the carrier on its invested assets

The higher the income on invested assets, the lower the premiums, and vice-versa.

The vast majority of life-insurer assets are invested in medium to longer-term fixed income bonds. As these bonds mature and need to be replaced into the portfolio, and as new premium money is collected by the carrier and needs to be invested, the carrier’s overall return on its portfolio is squeezed. This naturally results in lower yields to policy-owners, whether through dividends to participating whole life policies, or interest credits to (non-variable) universal life policies.

What does this mean to the policy-owner?

  • First, for those looking to acquire new product now or in the future, there are unquestionably going to be increases in premiums. This has already been seen from several carriers in the first two weeks of April alone. Almost immediately after the federal reserve rate-cut to an unprecedented 0.25%, carriers began announcing future premium increases. We’ve seen these in the range of 8%-12%.
  • However, much more significant is the impact on existing policy-owners. Policies purchased several or many years ago, when rates were significantly higher, have premiums calculated according to the interest crediting or dividend rate in effect at that time. These policies, unless they were guaranteed universal life (GUL) policies, will not operate as they were originally illustrated. Cash values, which are essential to the long-term viability of maintaining the planned death benefit, could very likely end up being depleted prior to the death of the insured.

The only exception to this is an “unblended” whole life policy which provides guarantees that the policy will remain in force as long as premiums are paid. However, in many of these cases, the policy owner has long since ceased premium payments, or has a strong expectation of ceasing future premium payments, as dividends were illustrated to replace premiums. Resulting lower dividends are creating policy loans, with usually relatively very high interest rates, thus creating increasing policy debt.

The net result to these policies is reducing and possibly even lapsing death benefit if premiums are not resumed (in the case of whole life) or increased (and perhaps very significantly so) in the case of some universal life products.

Why is this so critical at this time?

Sad, but true, many life insurance agents leave the business, whether through retirement, death, disability, lack of performance, or other issue. This leaves the policy-owner in an “orphaned” status. Some carriers will re-assign the policy to an alternate agent as “agent of record,” but the assignee has very little to no incentive to help a client, particularly one who is past the point of acquiring any new coverage.

This naturally results in a massive number of under- or un-serviced policies. According to LIMRA*, more than 40% of all life insurance policies are “orphaned.” This implies that clients are not receiving the service they need to review their policies to make sure they will deliver the death benefits originally contemplated. There is no doubt the cost of permanent life insurance will be higher than originally planned to deliver those death benefits, again, with the exception of guaranteed premium universal life insurance. But if reviewed in a timely fashion, the additional outlay might be a very small price to pay relative to losing the death benefit altogether.

Hence, this message: Review, Review, Review. Usually, this is a simple process and can be done by obtaining from the carrier an illustration known as an In-Force Ledger (or in-force illustration). When asking the carrier to run these illustrations, care should be taken to request the illustrations both at current interest (or dividend) rates, and then at rates closer to (or at) the guarantees inherent in the contract.

The times they are a-changin’. Life needs to be reimagined.

*LIMRA is the foremost worldwide research, consulting and professional development organization for the Life Insurance industry.

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