Transamerica recently began sending letters to certain policyholders who purchased policies that were issued between 1987 and 1998. The letter advises the policy owner that the monthly deduction rates (i.e., the cost of insurance charges) will be increased to cover the company’s expectations regarding its future costs of providing coverage and that the increase could be significant. This alone may cause ongoing increased charges to cash value accumulation and the policy to lapse earlier than was previously illustrated. For these policy owners a policy review is the only way to determine the impact of the change imposed by Transamerica.
I believe that a policy review will disclose that the increased policy charges are the tip of the iceberg. As with all non-guaranteed insurance policies, the failure of actual policy performance to live up to illustrated expectations has the potential to cause the policy to implode, and it is a problem that that needs to be addressed in the proper fashion before it is too late and/or too costly. When actual cash values fall, the “at risk amount” (death benefit – cash value) is higher. Since cost of insurance charges are applied against this higher at risk amount, the increased charges exacerbate the negative impact on policy values in all future years. At older ages this higher at risk amount becomes increasingly more costly because the cost of insurance charges in all cases increase with age.
Turning back to Transamerica, it is interesting to note that the policies affected by the cost of insurance changes were ones issued between 1987 and 1998. Prior to 1999, not all states had adopted the National Association of Insurance Commissioners Model Illustration Regulations. Before adoption of these regulations, the insurance companies could price their products based upon assumptions that were highly speculative. In addition, during the period of 1987 to 1998, assumed (but not guaranteed) interest rates were often in the 7%-8.5% range. Since then, crediting rates have fallen steadily. Transamerica acknowledges that the cost of insurance charges assumed in the illustrations were too low. There are a number of possibilities to explain this, but they are beyond the scope of this article.
The Transamerica notice serves as a reminder to everyone of how important it is to review your policy on a regular basis, because it is easier and less costly to prevent a surprise early on rather than 20, 30 or more years after the policy was issued and premiums were paid.
If you would like more information on this subject, or have a client who might benefit from a discussion about it, please contact Barry Koslow at bkoslow@mkaplanners.com or (781) 939-6050.
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