Post on 05-Feb-2016
description
Winning BIG With Guarantees
But Not Everything is Golden
The Birth of Guarantees….
In the 1990’s no-lapse secondary guarantees were created to… Jumpstart a stagnant UL life product
market Accommodate consumers’ growing
need for security Adjust to a rising economy coupled
with bear stock market
Carriers competing, sometimes with alleged overly aggressive pricing/ assumptions
Exaggerated possibility circulated by carriers not in this market who predict the downfall of any carrier marketing no-lapse products
Ratings agencies and industry watchdogs heightening the concern
What is the Debate About?
Estate Planning Works in Pension Max Table 4 term (best with 20 yr) table
shave Term to 100
Purpose of the Product
Examining No-Lapse Products
Guaranteed death benefit Specified minimum premium that will
guarantee death benefit Minimal cash value Not comparable to a savings account
Impact of policy modifications UL policy overall UL no lapse specifically
Policy loans face amount Switching DB option Rider additions
Reinstatement provisions Catch up provisions
Understanding the Product
One cannot buy a refrigerator and expect it to bake a cake!
Solvency Issues Aggressive pricing assumptions Portfolio yield Lapse rates Mortality rates
Regulator Response (NAIC)
More stringent NAIC testing guidelines “Our pricing assumptions, including lapse
assumptions are considered proprietary in nature. That being said, all of our universal life products, including LPR secondary guarantee products, meet the requirements of the National Association of Insurance Commissioners (NAIC) illustration testing (under which one test assumes no lapses after 5 years)”
-Andrew Niedzielski, VP, Fixed Life BusinessLincoln Financial Group
Regulator Response (AXXX) Guideline AXXX specifically calls for
companies selling no-lapse guarantees to establish reserve requirements using a mortality table and interest rates considerably lower than pricing and using a zero lapse assumption
On the other hand, Moody’s describes a set-up of 7% yields, 6% lapse rates and 100% mortality as “good”
Regulator Response Why the discrepancy between guideline AXXX’s
zero lapse rate and Moody’s 6% lapse rate? Ben Wolzenski, President, Actuarial Collaboration,
notes, “That is because the assumptions required in statutory reserve calculations are conservative. This reflects the fact that the state regulatory authorities’ primary duty is to ensure the solvency of insurance companies, not to facilitate lower prices for consumers. So a carrier might well assume, realistically, that there will be some lapses.”
XXX/AXXX Regulations Regulation XXX added reserving
requirements to level term life insurance programs.
Actuarial Guideline AXXX (effective 1/1/03), which increased the reserving basis on universal life policies with long-term secondary guarantees. (See tabs entitled “XXX/AXXX An Explanation”)
Industry Response Letters of Credit (LOC) Ongoing analysis and refinement Price adjustments Capital market solutions
Moody’s states that, “there will be more capital market solutions developed in order to help companies meet the requirements.”
Specific comments of rating agencies
(See tab entitled “Carrier Rating Reports”)
Carrier Wherewithal
“The rating outlook for AXA is stable. Fitch ratings expects AXF (stock market symbol) to further strengthen its operating earnings due to pricing and expense controls. Despite strong growth, risk-based capital is expected to remain above 300% going forward, and leverage is expected to remain below 25%. Fitch believes the subsidiaries of AXA/AXF will continue to receive parental support in order to facilitate acquisition or maintain the company’s current financial/ ratings position.”
Fitch Ratings on AXA
“John Hancock has one of the most carefully managed books of business in the industry and keeps its non-credit risk profile (liquidity, rollover/refinance, and interest rate risks) within tight pre-established tolerances.”
Moody’s on John Hancock
““Manulife sells universal life products which have long-term cost-of-insurance (COI) and ‘no-lapse’ guarantees. Regulation XXX was designed to make reserving practices for term and universal life insurance products with long-term level premiums more conservative. Regulation AXXX ,which is in effect for 2003, addresses some forms of secondary guarantees found in universal life products not already captured by XXX, including those products with ‘no lapse’ guarantees. As is the case for many U.S. insurers offering these products, we expect there will be some impact on the company’s U.S. statutory results, but that on consolidated Canadian GAAP basis there should be no impact {emphasis added}”
Moody’s Manulife Report:
Overall review
Revealed no definitive negative comments on other insurance carriers
Validity of Individual Rating Reports
Expression of opinions based on variable assumptions
Predictions, not certainty
Historical financials Current ratings Investment diversification Market focus Guarantee is only as good as the
company offering it
Due diligence
Head pricing actuary must comply with NAIC standards to follow guidelines or face fines; insurance co. can lose credentials
Even IF…pricing were to not meet all AXXX criteria, worst case scenario, insurance companies make lower profits, not necessarily become insolvent
Lapse assumption pricing concerns have been addressed through NAIC guidelines under AXXX; however products including no-lapse are still being projected to stay on a company’s books for an average of 8-10 years
We Have Reassurances:
Annual reviews Education Ethical selling and placement If selling a company with 30 day
reinstatement window, be sure to request the company sends billing 60-90 days before due dates(See tab entitled “Life Insurance Review”)
Fiduciary Responsibilities
Husband and wife (ages 71/68) bought 4 SUL policies 1992-1996
Purpose was estate liquidity Total premiums = $260,374 Total cash value = $147,694 $10M death benefit total Both husband and wife issued
standard
Case Study #1
A Few Case Studies…
Wanted cash value in policy in case estate tax repealed
Would like to lower gifts to trust Could qualify for preferred non-
smoking rate Some policies would lapse soon
without increased premium
Review revealed clients…
Case Study #1
1035 all 4 policies into $10M secondary guaranteed UL product
Results Lower annual premiums to $194,345
(reduced from $260,374) Client saves $66,029 per year Cash surrender value on current non-
guaranteed factors= $1,052,087
Action Proposed
Case Study #1
Male, age 70, $500,000 Face Existing Policy Gross Cash Value= $247,318 Outstanding Loan=$110,576 In-force projection: Lapses in 7 years
at age 77 on current factors 1035 Exchange into a secondary
guaranteed loan rollover product
Loan Rollover
Case Study #2
Result: Loan not repaid; loan interest charged=
policy crediting rate on loaned cash value
No further planned premiums $500,000 death benefit; db at issue net
of loan= $389,424 Even with loan outstanding, policy
stays in force until age 110 on a guaranteed basis
Loan Rollover
Case Study #2
Male, age 66, SNT, $75M face policy, $25M CV $12.5M outstanding loan Policy reprojections show lapse within 5
years on current factors Goals: avoid “phantom income” and
maintain net level db of $62.5M 1035 into guaranteed product, no loan
repayment
Jumbo Loan Rollover
Case Study #3
Results Maintained guaranteed net level db of
$62.5 No phantom income with guaranteed
db Annual cash outlay to keep guaranteed
level death benefit at $62.5M ($75M – 12.5M)= $1,003,959 (premium + loan interest)
Case Study #3
Jumbo Loan Rollover
David W. Simbro, FSA,Northwestern Mutual
“Will the rebirth of fixed life products via UL/SG work financially for insurance companies: Insurance companies are paid to take risks. Whether the prices they charge are sufficient for the risks they take can only be known over time, as experience unfolds.”
“We believe that long-term winners in this market will have a full understanding of their exposure to secondary guarantees, will exhibit pricing discipline and will have addressed the potential problem of reserve strain well ahead of the time it could become an issue for the company.”For individual company product information see tab
entitled “Company Product Information”
Moody’s Special Comments
- July 2004
NLG vs. Current Scenario Valued Male, Age 45 Preferred Non-Smoker
DB $1,000,000Company Product Premium Company Product Premium
Contin UL $8,399Elite G $9,187
Protector G $8,600
JFP Legend300 Plus
$9,308
JPF Legend300 XG
$8,799
Linc. Life UL-LPR5 $8,447 Linc. Life UL-DB$7,581(4.50%)
Manulife/ JH ULG (04) $10,520 Manulife/ JH Performance UL$8,484(5.40%)
MONY/ Equi Athena II $8,390 MONY/ Equi Athena II$7,768(4.75%)
Sun Life Protector LP2 $8,794 Sun Life Protector Plus$6,502
(yrs1-9 5.35%yrs 10+ 5.85%)
TransACE EX $9,050
TransACE GL $9,050
Travelers MVP $8,041 Travelers MVP$7,210
(yrs 1-10 4.65%yrs 10+ 5.15%)
Jeff PilotJPF Legend
300$7,962(4.85%)
TransAmerica TransAmerica Trans Ultra EX$8,669(4.75%)
Jeff Pilot
Solving for premiums being paid all years for a Fully Guaranteed Death Benefit
Solving for premiums being paid all yearsfor a CV as close to $1.00 at maturity
Amer. Gen. Amer. Gen. Elite 03$8,452(4.85%)
NLG vs. Current Scenario Valued Male, Age 45 Standard Non-Smoker
DB $1,000,000Company Product Premium Company Product Premium
Contin UL $9,851Elite G $11,207
Protector G $9,900
JFP Legend300 Plus
$11,540
JPF Legend300 XG
$10,091
Linc. Life UL-LPR5 $9,744 Linc. Life UL-DB$9,883(4.50%)
Manulife/ JH ULG (04) $12,413 Manulife/ JH Performance UL$10,066(5.40%)
MONY/ Equi Athena II $9,447 MONY/ Equi Athena II$9,533(4.75%)
Sun Life Protector LP2 $10,081 Sun Life Protector Plus$8,357
(yrs1-9 5.35%yrs 10+ 5.85%)
TransACE EX $11,540
TransACE GL $11,540
Travelers MVP $9,157 Travelers MVP$9,494
(yrs 1-10 4.65%yrs 10+ 5.15%)
Solving for premiums being paid all years for a Fully Guaranteed Death Benefit
Solving for premiums being paid all yearsfor a CV as close to $1.00 at maturity
Amer. Gen. Amer. Gen. Elite 03$10,704(4.85%)
Jeff Pilot Jeff PilotJPF Legend
300$9,462(4.85%)
TransAmerica TransAmerica Trans Ultra EX$10,646(4.75%)
NLG vs. Current Scenario Valued Male, Age 55 Preferred Non-Smoker
DB $1,000,000Company Product Premium Company Product Premium
Contin UL $12,676Elite G $14,473
Protector G $12,900
JFP Legend300 Plus
$14,423
JPF Legend300 XG
$13,617
Linc. Life UL-LPR5 $12,974 Linc. Life UL-DB$11,888(4.50%)
Manulife/ JH ULG (04) $12,866 Manulife/ JH Performance UL$13,418(5.40%)
MONY/ Equi Athena II $12,575 MONY/ Equi Athena II$12,666(4.75%)
Sun Life Protector LP2 $12,925 Sun Life Protector Plus$11,007
(yrs1-9 5.35%yrs 10+ 5.85%)
TransACE EX $14,100
TransACE GL $14,100
Travelers MVP $12,297 Travelers MVP$11,774
(yrs 1-10 4.65%yrs 10+ 5.15%)
Jeff PilotJPF Legend
300$13,911(4.85%)
TransAmerica TransAmerica Trans Ultra EX$13,774(4.75%)
Jeff Pilot
Solving for premiums being paid all years Solving for premiums being paid all years
Amer. Gen. Amer. Gen. Elite 03$13,997(4.85%)
NLG vs. Current Scenario Valued Male, Age 55 Standard Non-Smoker
DB $1,000,000Company Product Premium Company Product Premium
Contin UL $15,592Elite G $17,203
Protector G $16,000
JFP Legend300 Plus
$16,940
JPF Legend300 XG
$16,037
Linc. Life UL-LPR5 $16,230 Linc. Life UL-DB$16,144(4.50%)
Manulife/ JH ULG (04) $18,506 Manulife/ JH Performance UL$16,958(5.40%)
MONY/ Equi Athena II $15,165 MONY/ Equi Athena II$15,563(4.75%)
Sun Life Protector LP2 $16,749 Sun Life Protector Plus$14,175
(yrs1-9 5.35%yrs 10+ 5.85%)
TransACE EX $17,500
TransACE GL $17,500
Travelers MVP $16,035 Travelers MVP$15,535
(yrs 1-10 4.65%yrs 10+ 5.15%)
Solving for premiums being paid all years Solving for premiums being paid all years
Amer. Gen. Amer. Gen. Elite 03$17,896(4.85%)
Jeff Pilot Jeff PilotJPF Legend
300$16,145(4.85%)
TransAmerica TransAmerica Trans Ultra EX$16,995(4.75%)
Baker Associates
For more information contact our sales staff: Email us at: info@bakco.com Call us at: 1-888-899-6599
www.bakco.com
• Why are the companies that are raising the red flags not carrying no-lapse products?
Thank you
One Final Thought…
Baker Associates7502 E Pinnacle Peak Rd, Ste 116B
Scottsdale, AZ 85255