An article in the July 15th edition of Forbes Magazine by Ashlea Ebeling points out the devastating effect that the low interest rate environment has had on Universal Life policies. The article is entitled, Blame Bernanke – Thanks to low interest rates, that old universal life policy could be harboring a nasty premium surprise.
The policies she is talking about are Current Assumption Universal Life (CAUL) policies. Their performance is driven by two factors…the interest rates being credited on the policy Cash Value and the mortality charges that are deducted monthly. While in most cases mortality charges have not gone up (that could be changing soon and will be the subject of a future Blog), the crediting rate assumptions used at policy sale have not held up. In fact, in many Current Assumption UL policies sold the policy has never achieved its “hoped for” crediting rate. As can be seen from the chart above which represents the crediting rate for a “name brand” carrier, a policy sold 20 years ago would have had a crediting rate at issue of 7.5%. At no point after the first year (the first year rate is locked in) would that policy have received a crediting rate of 7.5%. Today that policy is being crediting at 4%, which is contractually guaranteed. By the way, a recent analysis of persistency by the Society of Actuaries just reported that about half of the Universal Life polices in force today are at least 15 years old.
The result? As pointed out in the article…a dramatic increase in premium to reach the original goals, especially in older aged individuals. For some policies on older aged clients, the annual costs to keep a failing policy in force are sometimes 5-10 times the original annual premium. (For a full explanation of why this is, go to our webpage at www.youritm.com and sign up for our September 17th webinar.)
This article seems to infer that the issue with non-performing CAUL policies begins and ends with today’s (artificially induced) low interest rates. Certainly they are not helping, but as can be seen by the information above, these policies have not lived up to expectations for decades. The article seems to lay the blame at the foot of Mr. Bernanke, but I suspect when the Beneficiaries wake up to the fact that their policies have not performed as expected, it is Trustee that will get the blame.