Tag Archives: Insurance Consumer Bill of Rights

Why We Need a Consumer Bill of Rights

As common as insurance is, most people do not understand this complex financial instrument.

According to the Bureau of Labor Statistics Consumer Expenditure Survey (2014), insurance is a consumer’s fifth highest monthly expenditure behind housing, transport, food and pensions. For many Americans, if you add up all types of insurance (auto, health, etc.), monthly total premiums can surpass housing costs.

But the insurance industry has its fair share of participants (companies, agents, wholesalers) who thrive on complexity and make sales that do not fit the client’s need. There has been a tendency — especially with annuities, life insurance and long-term-care insurance — to introduce insurance products with more options. And each time an option is added, it becomes more challenging to understand that product.

Often, this complexity is not a matter of intent; it is simply that even those within the industry or those who participate in the insurance procurement and review process (third party advisers such as financial planners, CPAs, etc.) do not understand insurance. The majority of people and companies do a good job, but there is a significant gap in insurance literacy in this country.

See also: Best Insurance? A Leadership Pipeline

The Insurance Consumer Bill of Rights was created to provide simple, easy-to-understand guidelines for everyone involved in the insurance ecosystem, including consumers, insurance agents, wholesaler, insurance companies and financial advisers.

The Insurance Consumer Bill of Rights is based on the simple premise that insurance agents, wholesalers and companies should place the consumer’s interests first, to the best of their abilities. The Insurance Consumer Bill of Rights provides simple, clear and reasonable guidelines to accomplish this goal. It is a standard of excellence for all in the insurance industry.

The importance of this movement is that, for many years, insurance has been a black box, something people know they need, although they have no real, unbiased information about it. And most people do not have the right coverage to fit their needs.

In my 30-year career, starting as an agent before making the transition to a fee-based insurance consultant/litigation consultant/author/consumer advocate, I have seen that the situation behind the scenes is often not pretty. However, the majority of these situations could be avoided if all members of the insurance industry followed the Insurance Consumer Bill of Rights.

Insurance consumers should have the right to receive any information that they request in a timely fashion. They should also be provided with all relevant information needed to make a decision in an easy-to-understand fashion. The goal is to not flood the consumer with something like a mutual fund prospectus; rather, it is to provide them with useful information.

It is always a win-win situation when all parties come out ahead and are on the same side of the table. Truth always has a way of coming out, and, to get ahead in this digital world where there are fewer secrets and more information and choices, those who strive to provide the highest-quality service and information will thrive.

See also: Fast and Slow: the Changing Landscape

For many years, consumers have ended up with insurance they don’t need, with premiums they either cannot afford or really see no value in paying. It is time to change the conversation so that consumers end up with coverage that fits their needs, with premiums they can afford into the future.

The Insurance Consumer Bill of Rights is a playbook for consumers, agents and companies to follow that puts everyone on the same page.

Monitoring an insurance policy and making adjustments to an insurance portfolio is something that is almost always overlooked. Insurance needs change. Sometimes, the change is as simple as getting a new car, while other times it can be more complex and overlooked, like having a new child who is not added as a beneficiary to an existing life insurance policy.

This is where the Insurance Consumer Bill of Rights matters. Making these adjustments, just like having regular maintenance done on your car, is what will ensure that a consumer has the right coverage in place at the time of making a claim. If the right coverage is not in place at claim time, what is the point of having insurance?

While it is not a panacea, and there still would be bad actors and inappropriate sales, the Insurance Consumer Bill of Rights is a call to action and gives guidance to consumers on what to look for, what to expect and what they have the right to.

Knowledge is power, and the power should be in the hands of the customer. Having and knowing your rights will protect and benefit consumers, along with calling the insurance community to task when needed and helping consumers and agents optimize insurance coverage and minimize premiums. Join the Insurance Consumer Bill of Rights movement!

The Insurance Consumer Bill of Rights movement is gathering momentum, and I want to thank all of its supporters. Recently, the Insurance Consumer Bill of Rights has received numerous mentions in the press:

  • Featured Article: It’s Time for An Insurance Consumer Bill of Rights — a reflection on how the Department of Labor Fiduciary Rule is a pre-cursor to the Insurance Consumer Bill of Rights.
  • As part of a joint effort with Chris Huntley’s Whole Life Rebellion that called for signing the petition, Forbes.com’s Barbara Marquand stated: “Sign the ‘Insurance Bill of Rights,’ a petition created by Tony Steuer from InsuranceLiteracy.org. Among other things, the bill says agents should act in consumers’ best interest and recommend affordable and appropriate coverage. (Click here to view the article.)
  • In an article on PTmoney.com titled “The Truth About Whole Life Insurance — Ethical Obligations and the Insurance Consumer Bill of Rights), it states, “Doctors take the Hippocratic oath and financial advisers the fiduciary oath. These are ethical codes professionals swear to live by in the execution of their duties. As of today, the life insurance industry has no such code, which is a travesty. Tony Steuer (InsuranceLiteracy.org) has created the Insurance Consumer Bill of Rights on Change.org, which seeks to implement a similar code of conduct in the insurance industry requiring all agents to act in the consumers’ best interest. The desired result would be agents targeting consumers’ specific needs to provide them with the most affordable and appropriate life insurance for their unique circumstances. Insurance agents should be held accountable for the advice they offer.” (Click here to read the article.)

And that is just some of the talk. So, what’s the next step? Please continue to share the campaign via email and on social media. And you can now contribute to the Insurance Consumer Bill of Rights movement through the petition page on Change.org, or you can support the Insurance Consumer Bill of Rights movement on Indiegogo.

The Case Against Whole Life Policies

One of the longest-running and most heated-discussions is about who is the greatest quarterback of all time. Many will say Joe Montana, but others will go with Tom Brady or Peyton Manning (among others). This discussion depends on your viewpoint and what you feel is valuable. At one time, the common answer may have been Johnny Unitas or Sammy Baugh, but their names don’t even enter the conversation for most of us any more.

Another long-running argument concerns whether whole life or term life is the greater life insurance product. (For the purposes of this article, we are omitting other common types of life insurance, such as universal life, variable life and indexed life.)  

My colleague and friend Chris Huntley, founder of Huntley Wealth & Insurance Services, is organizing a movement to promote awareness of term life insurance and some of the downfalls of investing in whole life. The Whole Life Rebellion fits into the Insurance Consumer Bill of Rights, which provides that consumers should purchase policies that match their needs.

Whole life insurance remains a top-seller. In fact, the American Council of Life Insurers estimates that 64% of all policies purchased in the U.S. are whole life.  

For the majority of consumers, term life insurance is a better fit. Yet, as with everything, it’s not quite so simple.

See also: Bringing Clarity to Life Insurance

The bottom line is that you need to be able to make that decision on your own, and the key is to become educated. The Insurance Consumer Bill of Rights is designed to provide guidance in knowing what questions to ask and what are reasonable expectations for your insurance agent and insurance company.

Rather than starting with the question of whether whole life or term life is better, consider the following points:

  1. Do you need life insurance? If you have no need for life insurance, then you have no need for either term life or whole life. We’ll go through the various reasons why whole life is suggested when there is no need for life insurance; just remember that, if you don’t need life insurance, then you don’t need ANY type of life insurance. Some day, I might buy a Porsche, but I’m not going to buy auto insurance on the Porsche until I own it.   
  2. How long do you need the life insurance? This is the classic question that really gets at the heart of the debate. Life insurance is needed when someone is financially dependent on you. Most needs for life insurance are for a finite period, such as providing insurance for the benefit of your children, most of whom will be financially independent by the age of 18 to 25. You may also need insurance to make sure your family can pay the mortgage. Well, most mortgages are for a fixed period and can be matched with term life policies, almost all of which are guaranteed for a certain time.   
  3. Will you outlive your term life insurance? What if the need for life insurance is permanent, let’s say for a spouse?  Well, in a situation where there are no other investments available to you or you choose not to participate in them, some type of permanent life insurance may make sense. However, according to the Economic Life Cycle Planning Method developed by Dr. Laurence Kotlikoff, your need for life insurance will diminish as your other assets grow. See my article with Dr. Kotlikoff published in AM Best, “A Different Approach,” or visit Dr. Kotlikoff’s site and learn more about the Economic Security Planner.
  4. Isn’t it true that only 1% of term life policies pay a claim? Out of all the term life insurance policies issued, only 1% will result in a claim. But how many homeowners’ policies pay out? Most people are happy if their home doesn’t burn down, and they don’t have to file a claim. Keep in mind that, while great statistics for whole life aren’t available because insurers consider the information proprietary, estimates are that 15% to 20% of whole life insurance policies result in a claim. One of the big reasons that so few whole life policies result in a claim is that many owners let them lapse every year. A joint study by the Society of Actuaries (SOA) and the Life Insurance Marketing Research Association (LIMRA) on 2007 to 2009 found that, in year one, 7% to 9% of whole life policies lapsed; in year two, 6% to 7% lapsed; and in year three, 5% to 6% lapsed. You can find the study by clicking here
  5. What if you have someone who will always financially depend on you or have some other permanent need? Is this finally a reason to have whole life? Well, almost. However, something called guaranteed universal life insurance acts as a term life insurance policy up to age 120 and does not build cash value. The premium is lower than a whole life policy. And of what benefit is a cash value if you intend to keep the policy in-force for the rest of your life? A primary rule in investing is lowering expenses when looking at two similar financial vehicles.
  6. Can you buy term insurance and invest the difference? That doesn’t work. With whole life insurance, there are very high surrender charges in the first few years of a policy, so when a policy lapses before the fourth or fifth year, the policy owner may only recoup 10% to 20% of the premiums paid. The question should really be, Will you still want to and be able to pay the premiums for a whole life policy?    
  7. Doesn’t whole life allow for tax-deferred cash accumulation? Yes, completely true. And so do 401(k)s, IRAs, etc. In these retirement accounts, you can have a wide variety of investments such as exchange traded funds with expense ratios of less than 1% per year. By contrast, whole life is a black box when it comes to quantifying expense. Costs and expenses are not fully disclosed and are at the discretion of the insurance company. And then, of course, there’s the fact that there’s no guarantee that the tax treatment for whole life insurance will continue. Almost every year, the U.S. Senate and House of Representatives discuss the cash value component of permanent life insurance and note that taxation of this “inside buildup” could yield $300 billion over 10 years. Hmmm, with a growing national debt….
  8. Whole life allows me to borrow from my policy: The key here is you are borrowing your own money, which you could do from many other vehicles such as a 401(k). And borrowing from your whole life policy may incur an interest rate that’s higher than interest rates on other types of loans and will also reduce the internal cash value build-up on your life insurance policy. Isn’t this the same as not investing the difference? And if you borrow too much money from your whole life policy, it can lapse without any value AND cause a phantom income tax gain. (See my A.M. Best article on the Pitfalls of Policy Loans.)

Consider that the CEO of Northwestern Mutual, John Schlifske, recently stated that face-to-face meetings are the best way to sell life insurance. Why face-to-face? The key word here is “sell.”

What if the goal was to help consumers make the choice that works for them? Yes, it’s a subtle difference, but the tone of the conversation needs to be changed.

If the only tool you have is a hammer, then every problem is a nail. If the only type of product your insurance agent has is a whole life policy, then every planning issue will be solved by whole life.

See also: What’s Next for Life Insurance Industry?

Having an efficient plan for your insurance and for your finances overall removes the need for whole life. Forty or more years ago, whole life insurance made a lot of sense,  especially as it was pretty much the only type of life insurance sold. But this was before the average consumer had easy access to the stock market through discount brokers, mutual funds and other modern ways to invest.

So, yes, using whole life insurance as a savings vehicle did make sense a long time ago — just like disco, hula hoops, pet rocks and Rubik’s cubes were hot items at one time.  

In today’s financial world, where there are many different types of life insurance and consumers have access to a wide variety of investment options, it does seem like the time for whole life has passed us by.

But the decision is yours. Knowledge is power. Become educated and use the Insurance Consumer Bill of Rights to guide you and your insurance portfolio.

It’s Time for a Consumer Bill of Rights

On April 6, 2016,  the Department of Labor (DOL) released its long-awaited fiduciary rule. It is clear that things will never be the same. While the fiduciary rule is limited in the products that it applies to, it is a clear sign that the time has arrived for the Insurance Consumer Bill of Rights.

Some complain bitterly about the rule — William Shakespeare has Queen Gertrude say in Hamlet, “The lady doth protest too much, methinks” — but there is clearly a trend, with the DOL’s fiduciary rule, the proposed rule by the SEC, new consumer protection rules for seniors and the amount of complaints to the Consumer Financial Protection Bureau. To go from Shakespeare to a more modern poet: Bob Dylan sang, “The times they are a-changing.”

It is time for the insurance industry to wake up. If the way business is conducted remains as is on products not covered by the fiduciary rule, there will be further regulations and scrutiny thrust upon the insurance world, and there will less opportunity to have a voice at the table.

Insurance Agents, Distribution Systems and Reasonable Compensation:

The traditional agent system has been fading away over the last couple of decades. There are very few companies that still have their own “captive” agents. “Captive” agents are those who primarily represent one specific insurance company such as Northwestern Mutual Life, New York Life, Mass Mutual, State Farm, Farmers, Allstate, etc. and who receive office space and other support from that company.

Most insurance is now sold by agents who represent multiple insurance companies and who try to find the optimal coverage for their clients at the most affordable premiums. Of course, there are agents who are driven by commissions, and those are the ones who are most affected by the fiduciary rule and whatever comes next.  Acting in the best interests of a client is something the majority of agents strive to do, but enough agents don’t that this type of regulatory change is warranted.

Insurance companies are rethinking their distribution strategies, as shown by MetLife and AIG. MetLife recently sold off its Premier Client Group (retail distribution entity with approximately 4,000 advisers). American International Group (AIG) sold off its broker-dealer operation. And a number of insurance companies have withdrawn from the U.S. variable annuity marketplace over the last few years: Voya (formerly ING), Genworth, SunLife and Fidelity stopped selling MetLife Annuities.

The real concern for insurance companies and agents is that they will no longer be able to sell a product that can’t be fully justified as suitable to clients. In other words, selling the annuity with the highest commission and the best incentives will no longer cut it. While the DOL rule only applies to those annuities sold in qualified plans, is it really a stretch of the imagination to consider class action lawsuits against agents who are not following the same practices outside of qualified plans?

And of course there is the issue of reasonable compensation. Reasonable compensation under the BICE is not specifically defined and is certainly open to interpretation. The DOL notes several factors in determining reasonable compensation: market pricing of services and assets, the cost and scope of monitoring and the complexity of the products. There is the interpretation that advisers who have more education (certifications, degrees, licenses, etc.) may be able to justify higher fees or commissions. This is also a good thing as this will encourage advisers to improve their skill set and be of better service to their clients. The Insurance Quality Mark is a great way for agents to show their level of expertise and professionalism.

That Ticking Sound You Hear?

The current distribution system is ineffective with the types of products sold and the accompanying incentives. Agents receive higher compensation for less competitive products, and they receive incentives for making sales targets. This is traditional for sales in any industry. However, as we’ve seen in the investment community, there are few traditional commissioned stock brokers and investment advisers, while the majority are now fee-based planners. Consumers expect more and are more financially literate. The Internet especially has changed the way financial products are sold. And insurance is part of the financial world.

The Securities Exchange Commission may finally be spurred to move forward with its own fiduciary regulation. SEC Commissioner Mary Jo White has stated that fiduciary reform is in order at the commission, and that the SEC should harmonize the rules for investment advisers and broker-dealers serving retail clients.

And will FINRA (Financial Industry Regulatory Authority),  NAIC (National Association of Insurance Commissioners), the CFPB (Consumer Financial Protection Bureau), the U.S. House of Representatives, the U.S. Senate or some other body move forward with their own set of rules and regulations?

The marketing material that I see from many firms is, “We put our customers first.” Thomas E. Perez, the secretary of labor, said in an interview: “This is no longer a marketing slogan. It’s the law.”

The pressure is on annuity companies and insurance companies to design simpler products with lower fees and increased transparency.

Everyone needs to rethink the entire sales and policy management process and follow the best practices outlined in the Insurance Consumer Bill of Rights. It requires insurance agents to place their clients’ (insurance consumers) best interests first to the best of their ability. The Insurance Consumer Bill of Rights focuses on common-sense, thorough communication and providing quality service in a way that benefits everyone. Following the Insurance Consumer Bill of Rights is a win for everyone.

The Bottom Line: 

Insurance agents, insurance brokers and insurance companies can be the leaders in providing insurance consumers with rights or can be led by follow-ups to the DOL’s fiduciary rule. The DOL’s fiduciary rule is not the end, it is only the beginning.

Again, it is good business for everyone when firms must fairly disclose fees, compensation and material conflicts of interest associated with their recommendations and not give their advisers incentives to act contrary to their clients’ interests. (It’s a sad state that such a requirement is necessary.)

The future is up to us. If we start to treat annuities and cash value life insurance as the complex financial vehicles that they are and start to better educate our clients and ourselves and carefully service them, then there will be positive outcomes. If we continue with the current approach, lack of education and disclosure, more contracts will terminate and there will be significant negative consequences for policy/contract owners and their beneficiaries, and agents may very well find themselves as defendants in litigation.

The Insurance Consumer Bill of Rights:

  1. The Right to Have Your Agent Act in Your Best Interest: to the best of her ability. Keep in mind that agents are not fiduciaries and are agents of the insurance company(ies). An agent recommendation should not be influenced by commissions, bonuses or other incentives (cash or non-cash). An agent should not collect a fee and a commission from the same client for the same work.
  2. The Right to Receive Customized Coverage Appropriate to Your Needs: An insurance agent should review your potential coverage needs per each line of coverage under consideration and take into account any existing coverage. Any new recommended coverage must fill a need (gap in coverage). Any replacement must be carefully reviewed with all pros and cons considered and presented in writing to the consumer.
  3. The Right to Free Choice: You have the right to receive multiple competitive options and to choose your company, agent and policy. Agents, brokers and companies must inform you in simple language of your coverage options when you apply for an insurance policy. Different levels of coverage are available, and you have the right to know how each option affects your premium and what your coverage would be in the event of a claim.
  4. The Right to Receive an Answer to Any Question: You’re the buyer, so you have the right to ask any question and to receive an answer. The answer should fully and completely address your question or concern in full and be understandable. If you don’t understand something, you as as the buyer have a duty to ask questions, and, if you still don’t understand, you shouldn’t buy that policy.
  5. The Right to Pay a Fair Premium: There must be full disclosure on how policy premiums are calculated and the impact of different risk factors specific to the type of coverage proposed. Also, information should be provided on factors that may reduce the premium in the future.
  6. The Right to Be Informed: You need to receive complete and accurate information in writing – anything said or promised orally must be put in writing. This includes full Information on any recommended insurance company, including name, address, phone number, website and financial strength rating(s).
  7. The Right to be Treated Fairly and Respectfully: This includes the right to not be pressured. If there is a deadline, the reason must be presented. If an offer is too good to be true, then it most likely is too good to be true. Insurance agents and companies should keep information private and confidential.
  8. The Right to Full Disclosure and Updates: You must receive notice of any changes in the coverage in easy-to-understand language and any relevant changes in the marketplace. All relevant information and disclosure requirements (required or not) on an insurance product must be presented to the client. You must receive in writing a summary of all surrender charges, length of surrender period and any additional costs for early termination. In any replacement situation, all pros and cons must be submitted in writing.
  9. The Right to Quality Service – You must be able to have your coverage needs reviewed at any time upon request, whenever a major event would affect coverage and at least annually. The agent must determine if changes have occurred with the client or in the marketplace that would dictate changes to the insurance coverage. This includes prompt assistance on any claims.
  10. The Right to Change or Cancel Your Coverage: This right must come without any restrictions or hassles.

View the Department of Labor conflict of interest final rule by clicking ere.

Support the Insurance Consumer Bill of Rights by signing the petition and sharing this post.

Can Long-Term Care Insurance Survive?

Why are long-term care insurance premiums rising faster than a speeding elevator? And what will become of the long-term care insurance marketplace? If you are interested in long-term care insurance, what’s going on and what may happen, read on.  If you have no interest in long-term insurance, then this is not the article you are looking for. (The next edition will take a closer look at the insurance consumer Bill of Rights).

Why Would Anyone Want Long-Term Care Insurance?

One of the largest projected expenses for the average American in retirement is medical expenses, with estimates approaching a total of $250,000.

Medicare and Medicare supplements provide coverage for medical expenses that are typically short-term or one-time, such as an annual physical, medical test or surgical procedure. Long-term care insurance provides coverage to pay the costs of service such as nursing home, in-home care and skilled nursing facilities that are not covered by Medicare or Medicare supplements. These costs are quite high—hundreds of dollars a day.  To see what the average cost of care in your area is, visit the Genworth Cost of Care page here.

The odds of needing some form of long term-care insurance can reach 50% or more, with an average claim period of two to three years (depending on the statistics you look at). According to the U.S. Department of Health and Human Services (HHS), by 2020, about 12 million Americans will require long-term care.

See Also: What Features of Long-Term Care Should You Focus On?

Long-term care insurance premiums will typically be in the thousands of dollars a year. However, just like with any other type of insurance, it is about the leverage of protecting against a risk—a simple financial calculation: Can you afford to pay for the risk in the event of a claim out of pocket and can you afford to pay the premiums? In terms of leverage, if you have a long-term care insurance policy with a total benefit pool of $250,000 and an annual premium of $5,000, the annual premium is 2% of the total benefit pool. If 2% sounds like good leverage to you, this policy makes sense.

The Big Question: Why Are Long-Term Care Insurance Premiums Rising? 

There are multiple layers to this questions, but the main underlying factor is that the first long-term care insurance policies offered by insurance companies had unlimited benefit periods on a type of coverage where they had minimal historical data. Think about it this way: If I offered you a bet on a football game this weekend with the provision that, if you win, I’ll pay you $100, and, if I win, you’ll pay me a $1 a month for the rest of my life. Now, that’s a great bet for me if my team consists of all-pros and your team consists of benchwarmers. Without knowing who is on your team, would you make this bet? There’s no need to answer; of course you wouldn’t.  Yet this is exactly the bet insurance companies made, just with much bigger numbers. And, unsurprisingly, this business model hasn’t been profitable for them.

There are some other major factors to consider, such as the prolonged historically low-interest-rate environment where insurance companies have not been able to make their historical investment returns. (This is something that no one could have foreseen.)

Another major factor is that insurance companies counted on a certain percentage of people lapsing (terminating) their policies at some point. Again, the insurance companies made this prediction without much historical data. And guess what? Policy owners actually liked and valued the coverage they purchased, and they have kept their long-term care insurance policies in force, despite some significant rate increases.

Premiums have had to be increased because, at the end of the day, it is in everyone’s best interest for insurance companies to be profitable. If an insurance company is not profitable, it will go out of business and will not be able to pay claims, which is definitely a problem.

Rate Increase Oversight and Perspective

Rates for in-force policies have been increased and will almost certainly face future increases; older policies still are priced lower than what a current policy would cost. Premium increases on long-term-care insurance policies have to be approved, in most states, by the state insurance commissioner. When faced with a rate increase, policyholders will need to consider whether their benefit mix makes sense and fits their budget. These are the “visible” rate increases.

If you have a long-term care insurance policy with a mutual insurance company where the premium is subsidized by dividends, you may not have noticed (or been informed) of a reduced dividend scale. When an insurance company reduces its dividend scale, it does not have to get approval from anyone or disclose that it has reduced its dividends. Reduced dividends mean a higher premium. This is a hidden rate increase.

As mentioned, policies issued today have significantly higher premiums than those issued in the past. Some rate increases are attributed to companies “catching up” on premiums to get closer to current premiums they hope are more accurate. The bottom line is that insurance companies are trying to bring the premiums on older policies into line with their current pricing on new products. The closer that pricing gets, the less likely it is there will be future premium increases. So, if you have an older policy (even if you’re faced with a significant premium increase), keep in mind you’ve gotten a discount on past premiums. While that’s not comforting in the face of a premium increase, it will help put things into perspective.

Insurance departments will approve premium increases so that they are sufficient to meet anticipated claims. Any increase granted must apply equally to all policy owners from the requested class of policies, and the carrier must keep the policy in force if the premium payments are made. Changes in age or health have no bearing on the contract premiums once issued; the policy may only be canceled if premiums are not paid. Nearly all existing long-term-care insurance policies have had one or more rate increases granted.

Please keep in mind that rates on other types of insurance also increase over the years, some slowly like auto insurance and homeowners insurance and some rapidly like health insurance.  Inflation affects everything. There are no nickel candy bars any more. This is all about the value of the coverage and the leverage of your premium to the total benefit pool.

Options When You Have A Premium Increase

When you have a premium increase, you should always start by reviewing your coverage and deciding whether you still need the current coverage or whether you can make changes. For example, because the average claim period is two to three years and there is a much longer benefit period, is the trade-off in premiums for the longer benefit period worth it? It is important to understand that, once a change is made, it cannot be undone, so be sure you are comfortable with any modifications.

The following are options when you have a premium increase:

  • Pay the increased premium.
  • Reduce the daily/monthly benefit amount.
  • Increase the waiting period.
  • Shorten the benefit period.
  • Change the inflation rider 
(e.g. go from compound to simple or reduce inflation percentage from 5% to 4%).
  • Change/remove other riders.
  • Terminate the policy.
  • If your policy has a non-forfeiture benefit that allows for a “paid-up reduced benefit,” consider this option: You’ll get at least some value for the premiums you’ve paid. But remember, once you accept the option, the policy will not be reinstated. Some states are now requiring all new policies to include this feature. (It’s relatively rare in older policies.)

New Long-Term Policy Designs (Hybrid/Combination Products)

With all the issues in the traditional long-term care insurance marketplace, there are very few companies selling individual long-term care insurance policies. Instead, insurance companies have come out with whole new types of products: hybrids and combinations. For instance, you can purchase a life insurance policy or an annuity with a long-term-care insurance rider. Other options are a life insurance policy or annuity that is combined with a long-term-care policy. (Rather than the long-term-care insurance being part of the rider, it is part of the policy.)

While, in theory, these sound like great ideas, they ignore some simple facts:

  • There may be no need for life insurance or an annuity, but you will be paying for the life insurance or annuity in addition to the long-term care insurance component.
  • Some require an up-front lump-sum premium payment.
  • These policies are complex and opaque. There are multiple variables to these policies that the insurance company can change and that will affect the performance of the policy—many of which do not have to be disclosed to the policy owner and do not show up anywhere. The more complex the product, the greater the chance that something won’t work properly.

Considering that insurance companies are still working on accurately pricing long-term-care insurance products and that universal life insurance policies are having issues (see: Will Your Life Insurance Policy Terminate Before You?), it is hard to imagine that combining two problematic products will magically work out.

The big selling point for these policies is that, with a traditional long-term-care insurance policy, the policy owner does not get anything back if there is no claim made. However, there is no expectation with any other type of insurance (except for life insurance) that there is a return if a claim does not occur, and most homeowners, for example, are happy when their house doesn’t burn down even though they don’t get any payout from their insurer.

Lessons Learned and a Positive Outlook For Long-Term Care Insurance?

There is no doubt of the importance of a thriving private sector long-term-care insurance marketplace. Public policy would seem to favor long-term-care insurance paid for by the private sector.

The Internal Revenue Service (IRS) is increasing the amount people may deduct from their tax returns this year when buying long-term-care insurance or paying monthly premiums. Check out the IRS page on long-term care Insurance premium deductibility here .

The Bipartisan Policy Center (BPC) released its first set of recommendations calling for increasing access to the private insurance market. BPC initiatives call for increasing access to the private insurance market, improving public programs such as Medicaid and pursuing a catastrophic insurance approach for individuals with significant long-term-care needs such as Alzheimer’s or a debilitating physical impairment. These proposals were developed by former U.S. Senate Majority Leader Tom Daschle along with Bill Frist, another former U.S. Senate majority leader, former U.S. Secretary of Health and Human Services Secretary and Wisconsin Gov. Tommy Thompson and Alice Rivlin, the former director of the Office of Management and Budget. They aim to address the needs of America’s seniors and specifically target middle- and lower-income individuals and families. Daschle said, “Today, families and caregivers are becoming impoverished by the financial demands of long-term care … Since there is no single, comprehensive solution to solve this unsustainable situation, our strategy calls for a combination of actions that could help ease the extraordinary financial burdens Americans are facing.”

If the BPC has its way, these retirement long-term-care policies would be sold on federal and state health insurance exchanges. The question is whether this can be accomplished. Part of the Affordable Care Act (ACA, aka Obamacare), the Community Living Assistance Services and Supports (CLASS) program established a national, voluntary insurance program for purchasing community living services and supports that is designed to expand options for people who become functionally disabled and require long-term help. Unfortunately, this program was abandoned because it wasn’t financially feasible.

History repeats itself

Back in the 1980s, insurance companies made similar poor product design decisions with individual disability income insurance. Unsurprisingly, claims experience was not great, and a number of companies left the marketplace. Is this sounding familiar?  The current individual disability insurance marketplace has returned with more sensible products, where the companies do full underwriting, offer benefits that are less than earnings and do not guarantee the premiums. A great read on this is: IDI Déjà Vu: Optimism For The LTCI Industry, by Xiaoge Flora Hu and Marc Glickman.

The long-term-care insurance industry is making similar changes to its products, which should buoy the marketplace. Products are being priced based on actual experience, policies are being fully underwritten and unlimited benefits are no longer available.

Smarter product design, better risk selection and a strong need should result in a solid long-term-care insurance marketplace. As America continues to age, there will be a stronger need for the coverage. It may take a few years, but there is a future for long-term-care insurance. The only real question is when.

Let me know what you think.

A Risk-Free Life Insurance Policy? (No)

Is your life insurance policy risk-free?

At its core, a cash-value life insurance policy consists of three components: interest rates/dividend rates, mortality costs (cost of insurance) and expense charges. And, over the last 10 years, interest rates have been at historic lows. They are often lower than the guaranteed interest rates on universal life insurance policies.

Something has to give.

Insurance companies traditionally have invested their funds in debt-related investments (mostly bonds). As insurance companies are not earning enough interest to meet the projected interest rates on universal life and other cash value life insurance policies, they have had to lower the interest rates they credit to their policy owners. On some of these older policies, the guaranteed interest rate is higher than what the companies are earning, so the insurance companies are losing money on interest rates.

See Also: How to Reach Millions With life Insurance

What happens when insurance companies lose money? Well, they’re not charities, so they look for the money in other places. Some companies have been able to make up some of the difference by changing their investment portfolio; however, by regulation, they are restricted in what they can invest in to some degree. 

Why Am I Reading About Universal Life Policies Terminating? 

Keeping in mind that almost every universal life insurance policy is crediting the guaranteed minimum interest rate, the insurance companies really only have one other component they can change to continue to maintain profitability. And that’s the mortality costs, also known as the cost of insurance.

A number of companies have recently announced increases in their mortality costs, though they do not typically disclose what the actual change is (dollar amount or  percentages). These companies include AXA Equitable, Banner Life, Security Life of Denver, Transamerica Life, Voya Life and William Penn Life. It is important to note that the companies are only raising mortality costs on some universal life policies, not all of them. 

It is highly likely that other life insurance companies will follow, especially if there are no repercussions (regulatory, media, consumer, etc.).  

Universal life insurance policies were originally promoted and designed to be transparent life insurance policies where the components were unbundled and, therefore, could be monitored. Transparency has not been the case — changes to mortality rates are not usually disclosed, — and changes in mortality rates can have a more significant impact on the performance of a universal life policy than a reduction in interest rates. 

If you have a whole life policy, you may be thinking, “Well, I’m safe, I’m getting my dividends.” Dividends are tricky. Companies with whole life policies have reduced dividend scales, but this is usually not disclosed anywhere—you just receive lower dividends. On a whole life policy where your original projection was to pay premiums for X number of years, you’ll find yourself paying premiums for much longer periods without ever being told. Most people don’t realize their premium payment periods have been significantly extended. 

Also, you won’t be building up the cash value that was on the original projection, so if you bought a policy using the “Missing Money concept,” “Be Your Own Banker concept” or a similar concept, you are almost certainly not going to end up where you expected. (This is setting aside the issue of whether these concepts really make sense, but that’s a topic for another newsletter/article.)

What’s This Mean for You? 

If you have a cash value life insurance policy, especially one purchased more than 10 years ago, your policy has a very high chance of terminating without value. To avoid this unwanted outcome, higher premiums are needed on almost every older universal life policy (traditional universal life, variable universal life or indexed life), basically on any life insurance policy where the premiums are not fixed. And if your premium is guaranteed, such as on a whole life policy, you may be paying premiums for significantly longer than expected or will be receiving a lower cash value.

“So,” you ask, “why hasn’t my insurance company or insurance agent told me about this?” Good question. The answer could be any or all of the following: The insurance companies are not facing facts; the insurance companies would prefer to not face the issue; the insurance company does not realize the issue exists; the agent doesn’t understand the problem; or the regulatory system is not addressing it yet. 

This is definitely a matter of concern because life insurance companies are not detailing the impact on premiums and the life of the policy. And companies are not required to do so; nor are they even required to notify policyholders of increases in their costs of insurance (mortality costs). 

How Do I Find Out About My Policy? 

Recently, Bottom Line Personal interviewed me for a story on this topic: “Your Life Insurance Policy May Be Terminated.”

As mentioned in the interview, the only way to determine the impact of this increase in mortality costs is through an in-force illustration. An in-force illustration is a projection of future values based on current assumptions. The Insurance Literacy Institute has free “Insurance Annual Review” guides that include a form letter to request in-force illustrations in the Resources Section. 

Your in-force illustration request should include a projection based on current premiums and assumptions, along with a request for the required premium to continue your policy to maturity (maximum length). The difference in premium may be significant.

What Should I do? 

A couple of things to consider are your health and life expectancy as well as your current need for life insurance. Most people find they don’t have a need for permanent life insurance because they have other assets they accumulate and that replace the need for life insurance. Remember, life insurance is for protecting those who are financially dependent upon you.

If you do need your life insurance policy, consider if you can pay the higher premium that would be required to keep your policy in force to maturity, or consider if a reduced death benefit would meet your needs.

You should also take a look at the ratio of premiums to death benefit. If you’re paying in 10% of the death benefit each year in premiums, then the policy doesn’t provide you good leverage.

Surrendering the policy is an option to consider, especially if there is a sizable surrender value.

See Also: Bringing Clarity to Life Insurance

Another option is selling a policy in the secondary marketplace (life settlement), though this needs to be approached carefully.

Big Question: 

How many other companies have increased their mortality costs, and how many other policies are affected?

The Future: 
 
Whether interest rates increase and when they do so and whether insurance companies are able to start to increase their investment earnings will determine whether insurance companies will maintain or increase their cost of insurance.   
 
The most concerning news came from Transamerica, which issued an announcement that illustrations requested by policyholders will no longer include information about the current cost of insurance rates or interest rates. Yes, that’s right. Policyholders with Transamerica will, possibly, not be able to have any idea of the premium required to fund their universal life policies. However, according to a recent report, Transamerica may have changed its mind.
 
The future is up to us. If we start to treat cash value life insurance as the complex investment vehicle it is and start to carefully manage it, there will be positive outcomes. If we continue with the current approach, lack of education and disclosure, more policies will terminate, and there will be significant negative consequences for policy owners and their beneficiaries.