Low premium illustrations have led to higher insurance costs, says expert

Huge increases supposedly boil down to a commoditization of products and a lack of understanding

Low premium illustrations have led to higher insurance costs, says expert

A large number of elderly universal life policyholders in the US have seen painful increases in their insurance costs as large carriers raise or attempt to raise their monthly deduction rates. While this is usually attributed to underfunding due to poor mortality results or interest rate compression, one financial expert argues that it  all comes down to misguided industry practice.

“Over the last few years we have reviewed large numbers of policies,” wrote Ron Sussman, founder and CEO of PolicyAudits.com, in a piece for Insurance News Net. “All of these policies have what seem like egregious increases in the monthly deduction rates (MDR).”

According to Sussman, the largest increases in premiums required to maintain coverage always involve underfunded policies. The blocks of business where rates have been raised reportedly involved everyday policy owners who paid what their agent told them to pay, or less, at the inception of the sale in spite of signals of lower interest rates that had been flashing for years.

At the heart of the problem, he said, was the industry’s “addiction to selling insurance as a commodity and the public’s complete lack of understanding of our products.” In particular, Sussman took aim at the practice of spreadsheeting, where clients are encouraged to choose the least expensive illustrated coverage — which, he argued, led to products that were bound to become underfunded.

“Carriers are notorious for pricing their policies using competitors’ products as the benchmark,” he said. “Whether it’s the least expensive premium for a death benefit product, or the highest income from an indexed universal life policy, spreadsheeting is rampant and the industry has made no effort to stop it.”

Sussman asserted that carriers should be obliged to live by the terms of the contracts they issued, so they should work through margin compression problems caused by low interest rates without burdening policy owners. “And let’s not forget the ravenous appetite many large carriers had for stranger-owned life insurance, investor-owned life insurance and other schemes they knew would come back to haunt them but took on anyway,” he said.

To minimize similar problems in the future, Sussman called for a stop to spreadsheeting, as the lowest-premium policies are unlikely to succeed anyway. In cases where spreadsheeting is unavoidable, he said clients must be encouraged to pay more than the minimum premium and be prepared to receive a lower-than-expected income.

“Based on our internal analysis, most of these problems could have been avoided if clients had paid roughly 10 percent more than what was illustrated at the time of sale,” he said. “That’s not a scientific number, as all policies are not created equal. But it’s a good start.”