Sudden, Sharp Increases in Premiums for Certain Types of Life Insurance Policies
For those who hold life insurance policies with variable premiums, beware of sudden, sharp increases in premium rates. If you have suffered financial hardship to keep up with the premiums or if you have defaulted on the policy because the cash value is depleted or because you cannot pay the premiums, you may have a claim. Contact The Higgins Firm for help.
Universal Life Insurance: Peace of Mind or Risky Investment Product?
People buy life insurance for peace of mind. For those with universal life (or flexible premium adjustable life) insurance policies, this peace of mind was marketed in the 1980’s and 1990’s as death benefits plus a “smarter” investment product. Whole life insurance offers fixed premiums along with a cash value or “nest egg” invested with a slow response to interest rate changes. In contrast, the universal (or flexible premium) life insurance product promises a death benefit, flexible premiums and a more nimble investment approach. In addition, many universal life policies boast a minimum return rate on the cash value investment.
However, universal life insurance policies are tied to market performance in good times and in bad. Forbes foretold the problem with the universal life insurance product in 2012. It states: “[u]niversal life is a modern invention that takes the “sure” out of insurance by tying the benefits to the performance of stock and bond markets.” After years of low interest rates, the lackluster performance of the investments underpinning life insurance products has prompted insurance companies to dust off the fine print of some less-celebrated provisions of the insurance contract.
The Fine Print
Insurance companies are suffering a crisis of minimal margins due to underperforming investments. In response, they have raised premiums at an alarming rate. Whether the premiums are paid through traditional monthly payments or through raiding the cash value of policies, the insurance companies justify the premium hikes as necessary to cover the costs of insurance (COI) by muddying the interpretation of the policies and/or introducing variables outside of those in the insurance contract.
The insurance companies point to the high maximum premium amounts written into the policies, as an argument that they are meeting their contractual obligation. They are also citing variables such as poor market performance in calculating their cost of insurance and thereby arguing that the premium increases are necessary. As cited in this New York Times article, the Plaintiffs in the Transamerica lawsuit (discussed below) characterize the premium increase as an effort to: “impermissibly shift to the policyholders its own, independent obligation to make good on the interest rate guarantees in the policies.”
Class Action Lawsuits Against Life Insurers
Two notable lawsuits were filed this year in response to the insurance rate hikes: a class action against AXA Equitable and the class action against Transamerica Life Insurance Company. The latter was filed in February and alleged breach of contract, bad faith and elder abuse, among other claims. The triggering event was Transamerica Life Insurance Company’s announcement on June 8, 2015 that it would unilaterally increase its premiums due to increased costs of providing coverage. As reflected in the lawsuit, the rates of increase pursued later in 2015 were “massive” at a rate of approximately 40% or more.
Plaintiffs in Transamerica allege that the sharp increases in premiums will induce widespread terminations or “shock lapses” that will benefit the insurance company and harm the consumer. Whether these premium payments are traditional monthly payments billed to a consumer or deductions from the cash value of the policy, the net result is no safety net. Insureds endure unanticipated financial hardship to keep up payments, or they allow the policy to lapse by missing a premium payment or by depleting the cash value of the policy.
Plaintiffs in Transamerica also argue that the insurance company used factors outside of the policy to justify this rate increase, including market performance. They contend that the increase was a pretext for recouping past losses and a roundabout way of making consumers pay for the insurance company’s obligation to return 5.5% interest on the investment portion of the policies. The lawsuit describes how “[l]ife insurers typically derive their profits from the spread between their portfolio earning and what they credit as interest on insurance policies. During times of persistent low interest rates, life insurers’ income from investments might be insufficient to meet contractually guaranteed obligations to policyholders which cannot be lowered.” See a copy of the Transamerica complaint.
The Impact on Older Americans
Consumers face an impossible choice: allow insurance companies to recoup losses by depleting the cash value of the policy or allow your policy to lapse. After decades of paying premiums to secure a death benefit, the premium increase becomes an unworkable financial burden, particularly for retirees on a fixed income. The cash value of their policy, once meant to be more insurance and security, is depleted just to sustain the death benefit. Also, the barriers to securing alternate insurance are significant for those who are older and for those with health problems. This “insurance” has eroded into a landslide of lost assets.
It is difficult to believe that insurance companies would lack the tools to be even more cognizant of the risks of failing to respond or to otherwise alert customers to long-depressed interest rates. And yet, insurance companies did not respond until now. The result is a catastrophic financial impact on people who bought life insurance to be insurance — to be peace of mind for their later years.