#171 | Lincoln Files Guaranteed UL Buyout Offers

A little over a year ago, ITM/21st reported that Lincoln Financial was making buyout offers to Survivorship Guaranteed UL policyholders in the form of an Enhanced Cash Surrender Value. Later that year, the Life Insurance Settlement Association (LISA) challenged the Lincoln buyout offers, which it claims was made on 5,300 in-force policies, on the grounds that Lincoln was “acting as a life settlement provider without the required license.” The buyout offers, according to ITM/21st, were generally slightly more than the cumulative premiums paid on the policy but it appeared as of last November that very few policyholders were taking the buyout offers.

However, Lincoln has been filing and getting state approval to expand the ability to make Enhanced Cash Surrender Value offers to single-life Guaranteed UL policies as well. This is a pretty interesting move. Not only are there vastly more Guaranteed UL policies on Lincoln’s books than Guaranteed SUL policies, but it signals that the economics of all Guaranteed UL are challenging, not just Guaranteed SUL and its particular reserving quirks. Lincoln undoubtedly ran a capital allocation model and decided that it would rather take a hit now from giving the buyout offers in order to free up capital that can earn a higher return elsewhere. The proof is that Lincoln is applying the buyout offers for policies sold after 2007, which is right around the time Lincoln became one of the top sellers in the industry on the back of ultra-cheap pricing and a tidal wave of STOLI. More than a few bottles in that vintage are corked.

But regardless, it’s a stunning recognition of the reality of Guaranteed UL economics by a company that has been one of the most prolific sellers of GUL since its inception and has one of the largest in-force blocks, if not the largest block, in the industry. Lincoln has been trying to scale back its GUL exposure for years, but a move to actually get in-force policies off of the books is a different matter because it raises bigger questions – what about the companies that are still selling cheap Guaranteed UL? When are they going to come to the same conclusion as Lincoln? And for Lincoln itself, what happens if policyholders don’t take the buyout offers? Does that mean that Lincoln is saddled forever with sub-optimal returns sucking up vast and increasing quantities of capital?

And the last question is the most pertinent for producers – what are you going to advise your clients to do when they get their buyout offers? Let me help you out on this one. Any time a life insurer wants to buy your policy back, you know you have something good. One of my grandad’s friends recently got a buyout offer from Ohio National for a Variable Annuity issued back in the early 2000s. She was inclined to take it because it was higher than her account value, but asked me to take a look. She owns a VA with a GMIB with a 6% guaranteed roll-up rate to age 85 (she’s in her early 70s), automatic annual step-ups, an enhanced death benefit, dollar-for-dollar withdrawals and no investment restrictions, all for something like a 1.5% fee. For those of you who are conversational in the annuity world, you’ll recognize that this very annuity is quite possibly the richest benefit ever sold. Needless to say, and much to Ohio National’s chagrin, she kept the annuity. Chances are pretty good that the folks getting their buyout offers from Lincoln have the same gold in hand. Don’t let them be seduced by the offer to trade it for bronze.