Many life insurance policies were purchased over the past 30 years to finance expected estate tax liabilities when estate tax rates were as high as 65% and all but as little as $600,000 was taxed.  Now that American Taxpayer Relief Act of 2012 (ATRA) makes higher exemptions and lower rates permanent, many of these clients who purchased life insurance to finance estate taxes no longer expect an estate tax liability and are seriously reevaluating their life insurance programs. With a permanent increase in the elevated estate tax exemption coupled with exemption portability, expect to see an overall decrease in the use of life insurance for estate liquidity purposes and an increase in the use of lower death benefit/higher cash value life insurance that can be borrowed from on a tax-free basis and can serve as a bond alternative in a rising interest rate environment.

Increasingly, the focus will be less on the tax considerations of estate and life insurance planning and more on using life insurance for earnings replacement, business succession liquidity, legacy equalization, etc. While healthy people will be more likely to cancelling these policies and re-deploy cash values, unhealthy insureds will either maintain their policies or transfer them to others, such as life settlement market makers or children, who will need to continue them. Either way, the impact of ATRA will certainly result in greater amounts of healthier people cancelling these policies while more unhealthy people maintain their policies.  At the risk of stating the obvious, this adversely impacts the amount of claims the insurer will pay, which insurers call “adverse selection”. 

When an insurer collect less in premiums than expected (i.e., because less healthy insureds are holding on to their policies and therefore less premiums are being collected) and is required to pay out more in claims than expected (i.e., because they have been adversely selected against), an increase in cost of insurance charges assessed to remaining policyholders is justified.  

However, insurers do NOT just increase cost of insurance charges on just unhealthy individuals in a particular block of business, and instead can increase cost of insurance charges across the board for all insureds across all product lines.  Operationally, there will be a greater need for post-transaction monitoring by the agent and changes to cash value products themselves to help clients better manage their cash and fixed income positions. If you don’t know what you are being charged, then you won’t know if/when charges have been increased on you, or if you are being over charged. 

INSPECT WHAT YOU EXPECT! Use a Veralytic Research Report to measure policy expenses and know if a particular insurer is increasing or decreasing policy expenses. If you(r clients) do not know what they are paying for cost of insurance charges (COIs), fixed administration expenses (FAEs), cash-value-based "wrap fees" (e.g., M&Es) and premium loads in their life insurance policy holdings now, then there will be no way to know if or when such policy expenses are increased. Now is the time to find out.

The appropriateness of a policy should be re-evaluated when the insurer announces product changes. In order to fully assess the impact of recent changes on your clients’ permanent life insurance portfolios, or to establish a baseline by which to judge the impact of future shifts in cost, request a Veralytic Research Report now. Just fax the detailed expense report along with the policy illustration toll free to 800-409-3222 or email to reports@veralytic.com to request a Veralytic Report for your client's policy. If the policy illustration is not available, download a sample Request for Information (RFI) letter to gather the necessary policy information.