#46 | GUL – Still Not What You Think
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My presentations on Guaranteed UL have a relatively happy ending. Yes, pre-2013 GUL policies were often riddled with provisions that created risks largely undisclosed or inadequately disclosed to policyholders. Yes, most of those provisions were created to exploit loopholes in AG 38 and allowed insurers to hold smaller reserves. Yes, those risks have blown up, are blowing up and will continue to blow up without careful administration. But yes, the loophole was closed last year and so GUL products written post 1/1/2013 aren’t as risky as the outgoing versions. I framed the problem as primarily dealing with the old block rather than with new sales.
Well, I was wrong. I spent a couple of days digging through the Florida insurance filing website and reading the contracts. What I found was that current GUL policies are all over the map. Some have been updated and lack mechanisms such as multiple shadow account charge structures that clearly existed to exploit the loophole in AG 38. Some have been updated but still have the same or similar mechanisms. The largest category, however, is comprised of policies that appear to be unchanged since the first of the year and obviously contain all of trap doors already causing problems in older policies. But virtually all of the GUL policies I saw still had some form of complexity that you wouldn’t catch in an illustration but might lead to some unexpected outcomes in real life. As a result, I’ve had to change my closing line in my presentations. If you’re going to sell Guaranteed UL, you have to read every policy contract. Nothing is as simple as it seems.
New and Relatively Clean
Principal Financial revised its GUL product in the 3rd quarter of 2012 to become “AG 38 compliant” and the result is one of the cleanest contracts I could find. The one quirk is a steep tiered premium load that could be a problem if your client wants to alter his premium stream or accidentally pays late or early. The contract specifies a Lapse Protection Target Premium in all years and states that premiums below the LPTP have a 0% load but any premiums above have a 30% load. This is the same sort of math that tripped up Nationwide policyholders when they accidentally paid a few days early. There are several older policies that are fairly clean (Aviva, Nationwide, MetLife, Minnesota Life) as I discussed in a previous post. However, Aviva and Nationwide had meaningful tiered premium loads or interest credits and MetLife had a “risk adjustment charge” that penalized chronic underfunding.
New and Complex
Lincoln LifeGuarantee UL
This product was filed in Wisconsin on 4/5/2013 and has more than a few landmines. First, it uses an extensive schedule of tiered premium credits for the secondary account that holds overfunded premium. The base account has a fixed 6.75% rate but the secondary account scales down from 5.50% to 3.25% with age. Second, it has different premium loads depending on the policy year, starting with 13% in year 1, 20% in years 2-20 and 5% thereafter. Third, it has a mechanism called the Level Funding Test that will assign a penalty if the policy fails the test. It’s tested monthly and the contract states that “if not met, (it) could negatively affect the length of time your Coverage Protection Guarantee remains in effect.” From what I can tell, the funding level appears to be not so far below the level GUL premium. In other words, don’t skip your premiums in this product. You’ll get whacked just like on the old version. I’m also happy to report that Treasury IUL’s shadow account appears to be significantly less complex and doesn’t appear to contain the level funding charge.
Prudential UL Protector
This product contains a similar provision to Lincoln’s called the No-Lapse Default Charge. It gets triggered if the policy goes into default and generates large penalties for keeping the policy in force following default. Prudential’s contract appears to be otherwise clean, but this provision could put some serious teeth in policies where clients missed payments or live to the end of their funded guarantee period. Fortunately, the default charge is discretionary up to guaranteed maximums as specified in the filing.
Hartford Freedom UL 2013
Hartford has both tiered interest credits and tiered premium loads, both of which can cause unsavory results with the funding pattern deviates from plan. Premiums in the overfunded account get hit with 30%+ loads versus 0% in the base account. Interest credits drop from 7.40% in the base account to 3.35% in the overfunded account.
Banner LifeChoice UL
This one really blew my mind. It was filed at the very end of 2012 so should conceivably be built for the new AG 38 revisions. But, amazingly enough, it has a toxic trifecta – dual shadow accounts, tiered interest credits and a “Risk Adjustment Rate.” The dual shadow accounts are textbook pre-2013. Table B has charges that are 4 times more expensive than Table A. Premiums allocated to the base account get a 7% credit, overfunded premiums get a 0% credit. The Risk Adjustment Rate kicks in if the policy is underfunded relative to a specified premium. In other words, Banner will give you no credit for overfunding, will charge you when you overfund and then bill you 4 times the normal rate when your policy lapses. Great. Just what I’d recommend for my grandmother.
Old and Complex
I pulled filings from both Florida and Wisconsin. The stamps on many of them read dates prior to 2012. I could run down the list but it’d be a bit cumbersome. The conclusion is that a majority of products being offered today (especially some of the most competitive ones) appear to have not been significantly changed since 2011. There are probably a few good explanations. One is that AG 38 didn’t say that the products had to change, it just disallowed the surplus relief from exploiting the loophole. Second, states have been backlogged with applications and may not have gotten around to all of them. Third, some states are in the interstate compact and some aren’t. It’s possible that states like Florida (not in the compact) are using older filings than states in the compact. Regardless of the reason, the action remains the same – read the policy contracts. Every single one.
In closing, I don’t think this is necessarily bad news. It’s what we should have expected. Life insurance has the amazing and unique quality of allowing an insured to offload mortality risk. There is no substitute. But life insurance is also a financial product and all financial products have risk. The right response isn’t to avoid GUL – the right response is to understand it and put it into correct context with other life products. Price and guarantees should be only two factors out of many in deciding which products to use.
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